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Market return

The expected long-run return of the broad market. Subtract the risk-free rate from it and what remains is the equity risk premium.

Updated 2026-09-03

The expected market return is what a broad equity index is assumed to return, and it is the anchor the cost of equity is built from. In Angie it is not measured. It is constructed.

expected market return = risk-free rate + equity risk premium

So roughly 9.8 percent when the 10-year Treasury pays 4.8 percent. See risk-free rate and equity risk premium.

It used to be the trailing five-year realised return of the S&P 500, and replacing that was one of the more consequential fixes in the engine. A realised return is a description of the recent past, and after a strong run it implied a risk premium of about 6.3 percent, which beta then multiplied. Every high-beta company was being punished for the fact that the index had done well.

The trade-off is honest and worth stating. A constructed figure is stable and comparable across time, and it stops the model becoming mechanically more bullish after a bull market. It also cannot notice when the real premium genuinely changes.

See also

  • Equity risk premium — The extra return investors demand for holding stocks instead of Treasuries. Beta scales it up or down for one particular company.
  • Risk-free rate — The 10-year Treasury yield, standing in for the return available with essentially no risk. Every other rate in the model is built on top of it.
  • Cost of equity — The return shareholders demand for owning this particular company. Known as CAPM, the capital asset pricing model.

← See this one in the deck

Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.

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