The risk-free measure of the risk-free interest rate should be the market risk premium. Risk-free interest rate used for market risk premium
The estimated return minus the risk-free investment return equals the risk premium. For example, if the estimated return on an investment is 6% and the risk-free rate is 2%, the risk premium is 4%. This is the amount an investor is willing to make on a risky investment.
The risk-free rate acts as a minimum rate of return to which the excess return (beta multiplied by the equity risk premium) is added. The Equity Risk Premium (ERP) is calculated by subtracting the risk-free interest rate from the average market return (S&P 500).
The formula for calculating the risk premium is very simple. Simply subtract the expected return on a particular asset from the risk-free interest rate, which is the current interest rate paid on risk-free assets such as government bonds and government bonds.
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