The market risk premium (MRP) is the amount that an investor expects to earn from an investment in the market above the return that can be made on a risk-free investment. In theory, the market consists of all assets in the economy, but it is impossible to observe and measure the return on all the help. Therefore, the equities market is commonly used as a proxy. It is the only market where prices are regularly and reliably observable for a broad cross section of the economy.
             A forecast usually begins by comparing the expected return of a risky asset with that of a low-risk investment, such as government bonds. Generally, the best way to get a sense of what the future may bring is to look at the past. After all, the past is our primary source of data. However, the market is quite volatile. The only way to get a good representation is to look back over a long period. The ups and downs of the market tend to cancel out and get a reasonable average (long-run historical average method).
             The MRP is most prominent in the Capital Asset Pricing Model ("CAPM"):
             E (Ret) = Rf + [E (Rmt) – Rf] * β
             Ret = cost of equity capital at time t,
             Rf = risk-free rate of return,
             Rmt = market rate of return at time t,
             E (.) = indicates the variable is an expectation, and
             β = systematic risk parameter.
             The MRP in the CAPM is [E (Rmt) – Rft] - the amount by which the return on the market is expected to exceed the return on the risk-free asset to compensate for the risk inherent in the market portfolio. This is an expectation of investors and therefore is not directly observable. Generally, a range of plausible values is identified, and the MRP is chosen within the field, most commonly at the midpoint.
             However, the market today is quite volatile; we can't solely base on the historical average method to look at the market. Furthermore, investors are "alert" and "mode
             ...