Market risk premium & risk-free rate
The freely accessible sample of the KPMG Valuation Data Source provides an overview of the current market risk premium and the current risk-free rate. Through our database, we provide you with free and user-friendly access to up-to-date and reliable capital market data.
Market Risk Premium and Risk-free Rate at 07/31/23
The current market risk premium as of xx.xx.23 is: 5.3%. This is an increase/decrease of 0.25 basis points compared to the MRP as of xx.xx.23
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Information on the market risk premium
Significance of the market risk premium
In the Capital Asset Pricing Model (CAPM), the market risk premium (MRP) is a key component in determining the risk premium when calculating the cost of capital. It reflects the difference between the market return (i.e. the return required to hold the risk-based market portfolio) and a risk-free investment (risk-free rate). The company-specific risk premium results from the MRP multiplied by the individual beta factor.
Derivation of the market risk premium: historical vs. implicit market risk premium
The market risk premium is always an expected future value. Various methods can be used to determine it. One possibility is to derive the MRP based on historical returns realized in the past and the risk premiums derived from them (historical market risk premium).
Alongside this, the derivation of an implicit MRP has become established. This is determined on the basis of future-oriented expected returns and risk premiums derived from stock market prices and earnings estimates by financial analysts. In practice, the combination of historical and implied returns provides a transparent and broad data basis for deriving an expected future MRP. Both approaches are also recommended by the IDW's Expert Committee for Business Valuation (FAUB).
Determination of the risk-free rate
In practice, the risk-free investment is often approximated using the risk-free rate. This is derived from “Svensson” parameters, which describe the yield curve of German government bonds, for example, at current reporting dates. The risk-free rate constitutes a good reference for the general interest rate level and for the average long-term (virtually) risk-free return at a reporting date.
What the data extract provides
In the current data extract, we show the implicit total return, the risk-free rate and the market risk premium, which results from the delta of both parameters, over time. In addition, we show the rounded risk-free rates for the current reporting date.
Frequently asked questions
What is the market risk premium?
The market risk premium can be derived by calculating the difference in returns between investments in a representative market portfolio – consisting of risk-based investments (especially company shares such as equities) – and risk-free investments. The calculation can be made on the basis of historical data and on a forward-looking basis.
How are forward-looking return estimates determined?
KPMG's analyses of forward-looking implicit returns and risk premiums are based on a model that considers the share prices and earnings forecasts of financial analysts for companies in a broad market index, such as the S&P 500 for the USA or the DAX family for Germany. Therefore, we usually apply dividend discount models and residual earnings models. The parameters used in these models for the planning period and the perpetuity are based on common assumptions in valuation models.
How is the risk-free rate calculated?
The risk-free rate is derived from zero-coupon bonds of (virtually) risk-free bonds. Government bonds from AAA countries, such as those of the Federal Republic of Germany, are commonly applied for this purpose. As they are considered (virtually) risk-free, the interest rates derived from them are a good reference for the long-term (virtually) risk-free return.
