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What is market risk premium and how to calculate it?

Remember the saying, no pain, no gain. Well, it fits well everywhere. Be it life, business, finance, investments, relationships, physique, adventures, stock market, or anything. Some pain is a must to gain in life. And usually, the gains are much higher compared to the pain. In plain words, a market risk premium is the rate of return on investments with a higher risk level. 

A little bit of adrenaline rush is required to live a healthy life. After all, what is life if not taken with a pinch of salt?  

Have you guessed already that we will talk about something related to risk today? Well, precisely, the market risk premium! Equate the pain in the example above with risk, then what would the gain be? Naturally premium! And as you know, the benefit is much higher than the pain. Or it is higher if you take the pain willingly. So today, we will discuss the concept of risk premium, its fundamentals, how to calculate it, its types, & much more. 

Without delay, let’s start with understanding the basics of the concept. 

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What is the market risk premium?  
 
What is the market risk premium?  

We all know there are different types of investments. If we ignore the technical aspect of it, even if someone lives under a rock, they would still know about some ‘kinds’ of investment. Some are the kind that gives you higher returns. But these come with a higher risk level as well. Others are the ones that offer security, but the returns are also proportionately lower. Now, where does market risk premium come into the picture? In plain words, it is the rate of return on investments with a higher risk level. 

In the two categories, we talked about in the previous paragraph, the rate of return on the latter, the ‘safer’ investment, is known as the risk-free rate for obvious reasons. And in the other category, the rate of returns is known as the expected return. 

What we want here is the difference between both. The market risk premium is the difference between the expected rate & the risk-free rate. 

Now, you have a definition; you know how to explain it in words. Now, let’s look at it in numerical terms with the help of an example.  

How to calculate market risk premium?
 
How to calculate market risk premium?

As discussed earlier, it is the difference between the expected and the risk-free rate. Also, don’t forget that the expected return is generally higher than the risk-free rate, as discussed. So, the market risk premium formula would be:

Market Risk Premium (MRP)= (Expected rate of return)- (Risk-free rate).

For example, the expected return on stocks is 10% currently, and on bonds is 2.5%. As we can see, the expected rate of return on stocks is higher than the government security bonds. You know it is because bonds are a secure, risk-free investment option. Now, we need to calculate how much premium we will be getting. 

So, putting the figures in the formula, we get the following equation:

MRP= Return rate on stocks- Return rate on bonds

MRP= 10%-2.5%

Thus, Market Risk Premium (MRP)= 7.5% 

So, now we have a figure. Thus, anytime we invest, this is how we can know the premium rate on it. 

Now you know what the basic concept is and how to calculate it. Now, let’s discuss the difference between risk premium and our topic for today.

If you need some ideas about what to read next, here they are:
Risk premium and market risk premium~

Now, though they sound similar, there is a little difference between them, a difference that converts into a not-so-little difference in the long run. You know about the latter. Thus, let’s discuss what risk premium is first. And then we can head to the difference in both. 

The rate at which shares & stocks accrue a return is called the equity risk premium. It is used for stocks & shares, and thus the word equity. Also called the expected rate of return, it is generally higher than the risk-free rate.

So, now where is the difference? The difference is the ‘additional’ that comes with the market risk premium. The risk premium is the rate of return on stocks, but here, the whole concept is of the extra returns you make on risky investments, not the risky ones. The addition, surplus, is what adds to the margin here. 

You know the fundamentals, the calculation, and the differences. Let us discuss the types now. 

Types of Market Risk Premium
 
Types of Market Risk Premium~

Over the years, the concept of premium and risk premium has evolved into various types. The bases for such classification would be the calculation, concept, stakeholders, and many more. Some other factors affect the premium, such as legal, technical, external, and international factors. The following are the types of market risk premiums:

  • Historical market risk premium- As the name suggests, the premium is calculated based on the historical performance of the return. It is different for different instruments. To comprehend the activity, S&P 500 acts as an indicator generally. 
  • Required market risk premium- We need to focus on the term ‘required’ here. Why is it required? It is because it is the minimum rate that needs to be present. It implies that if the rate is lower than this, it is highly improbable that anyone would invest. It can differ from one investor to another. 
  • Expected market risk premium- Depending upon your degree as an investor, the expectations from an investment differ. Based on these expectations, the expected additional returns also vary. Thus, the rate expected is known as the expected market risk premium. 
 How does Secvolt make this easier?
 
How does Secvolt make this easier?

Think of a company that offers a minimum of 42% returns at zero percent of the risk. Sounds like a dream? Well, it is a reality now. With the finesse of an algorithm and the ever-experienced team, Secvolt keeps you in a win-win situation with the whole risk & premium thing. And how do we do that? First, we give you the privilege of selecting your desired risk level. And secondly, irrespective of the degree of risk you choose, the surplus you gain is the best you deserve! As said, when at a risk-free level, if you earn a market risk premium of a minimum of 42%, imagine what we are yielding to people who trust us with even one percent of the risk. Take a look for yourself (https://secvolt.com/) & leave all your financial worries to us.

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Ashish Verma

Ashish Verma is the founder and CTO of Secvolt, with close to 10 years of experience in the IT industry. He has been the technical backbone of the company and has worked tirelessly to make the technical infrastructure robust. He is a passionate entrepreneur who generates solutions that have the potential to bring change.

In order to ease the client’s interaction with Secvolt, he has strived to develop the business’s technological foundation and establish a user-friendly platform. Ashish has also contributed substantially to smoothening the company’s administration and ensuring that there are no lacunae in the broad structure of the organization. 

Early Years

Coming from a middle-class family, he was aware of the problems that people faced while using technology. He sought to create something that was simple to use yet had a powerful effect. As he studied computer science, he became eager to offer a solution to real issues. He began his professional career at Amdocs, where he gained expertise in client management while catering to more than 20 clients. Later, he moved to Citicorp, where he had exposure to the investment industry. His time at Amdocs and Citi enabled him to produce high-standard, efficient, and scalable technical infrastructure.

He left corporate jobs for his startup because he was passionate about working on the concept of a smart city platform. He expanded the concept internationally and even collaborated with Global Dignity-Kuwait. Things didn’t work out for him the first time. He states, “My failures didn’t stop me from experimenting and trying new things.” He rose from the ashes like a phoenix and founded FewerClicks, an End to End IT solution company.

He worked on the creation of Solster Finance, a decentralized financial platform based on the Solana blockchain. He created this platform single-handedly which has helped the team raise a $1M investment and a revenue of more than $5M within 6 months of launching. 

He has previously worked on many blockchain technologies and cryptocurrency ventures, which include Decentralized Finance Applications (Defi), Decentralized Applications (Dapps), File Contracts (SIA, record-keeper), Smart Contracts (rust, solidity), and NFT Development. His experience and effective communication have helped many team members understand Secvolt effectively and the underlying technology it is powered by.

He possesses the ideal combination of strategic thinking and excellent business insight. He is responsible for formulating technical aspects of the company’s strategy to guarantee alignment with business objectives. With his drive to experiment with new technologies, he has helped Secvolt achieve a competitive edge. Being in charge, Ashish never holds back in encouraging the different departments to make profitable use of technology, helping to grow as an unstoppable team at Secvolt!

Hanif Shaikh

Hanif Shaikh is the founder and CMO of Secvolt, with over 8 years of experience in the industry. He plays a crucial role when it comes to the growth of Secvolt. Since the beginning, he has acted as a mentor for each and every employee of the company, and he makes an effort to be accessible to his staff anytime they need him. 

Hanif first entered the Blockchain and Crypto world in 2016, and nothing has stopped him since. He views blockchain as a transparent platform that provides authority and accountability back to the people. He consistently believes that “overcommunication is better than miscommunication.” He has lived by this motto with his staff, clients, and networks.

Early Years

Hailing from Gujrat, a state in India, he is following his dream to contribute to making this world a better place. In the process, he has struggled, made some mistakes, and learned lessons from those mistakes to achieve success in life. His entrepreneurial attitude dates back to his childhood when he learned from his father’s business and aspired to have it all. He came from a humble background and had ambitions to succeed in life.

He has developed two successful businesses from scratch, and in the process, he has inspired young people to start their own businesses. He was an integral part of the Quora Mumbai Meetups and helped it become a great success in a short period of time. Later, he began organizing meetups to raise awareness about blockchain, cryptocurrencies, and their applications. He also shared his knowledge of ICOs, highlighted reputable ICOs, and established a small cryptocurrency community on WhatsApp groups.

He chose to go on a Blockchain Tour in India in 2019 and met some fascinating people. Throughout his journey, he has been able to build an extensive and robust network that has aided Secvolt’s growth. Because of his expertise and understanding of the Crypto Industry, he has been featured on several news channels and has advised the youth on the subject.

He is in charge of the company’s marketing operations and is responsible for developing its marketing strategy and vision. He oversees a group of passionate marketing professionals and plans promotional strategies with the goal of making  Secvolt a global brand. 

He is a perfect blend of a practical attitude and innovative business acumen. He believes in the ability of individuals to perform exceptionally well when given an environment to experiment and explore their passions; a culture that he has built at Secvolt.

Divakar Choudhary

Divakar Choudhary is the founder and CEO of Secvolt who has been trading for more than six years now. He started the business in 2018 with the conviction that if anybody could dominate the market, it was him. He poured all of himself into the business and turned Secvolt into a market-beating machine.

Divakar developed the fundamental quant models that perform risk management and capture alpha using his skills from the previous organization and his time spent in the market. In order to make the system effective, he backtested risk mitigation algorithms and worked on them for more than 4 years to produce results.

Early Years

He began his crypto journey in 2013 after getting his first gaming Laptop and melded in with the Blockchain community like sunbeams on the ocean. He created many YouTube channels at the age of 15 and businesses by the time he was 17. Technology has always piqued Divakar’s interest. He endeavored and succeeded at freelancing in his effort to achieve financial independence. However, he soon realized that freelancing would always keep him in the rat race, and the only way out would be to build a machine yielding generational wealth.

Soon, he started trading using his own capital but suffered a loss in the market. He says, “95% of people lose money & the rest 5% make money from the loss of those 95%.” He then began working on an effective technique to be included in this 5% after losing part of his own assets during the early stages of trading. He began evaluating quant strategies using statistical models.

With his methodology, he once produced a 20% ROI in a single month. With the zeal of creating something exceptional, he borrowed money from friends and family and generated decent returns for them using primitive quant models. Month after month, the system’s efficiency and the competence of the man behind it allowed for excellent market returns.

In the beginning, Divakar worked on his laptop for over 18 hours. It took every ounce of his energy as he executed about 530+ deals daily for 4 years to create this company from the ground up. In 2021, he increased his volume by 827%, trading a total of $52 million and hitting a single account.

In his words-

“What does becoming “THAT” GUY mean to you? Who did you need when you were young? Be that person!”

He is a perfect example of someone who followed his passion and made a fortune from it! He dreamt of creating generational wealth as a youngster, envisioned it as an adult, and is now making it a reality with Secvolt!