MRP stands for market risk premium or equity risk premium. The market risk premium is the premium expected as a reward for taking on the ‘market risk’ in an equity investment.
You have no guarantee of a profit when you invest in a free market. You are taking a risk when you invest in the market. This risk is often referred to as ‘market risk’. The market risk premium is the premium expected as a reward for taking on the ‘market risk’ in equity investment. The market risk premium is the excess return offered by the market over the risk-free rate. Market Risk Premium can be computed as follows:
Market Risk Premium = Market return – Risk-free rate