Question

What is market risk premium? What’s reward-to-risk ratio? Any similarities and differences?

Answer 1

Market Risk Premium is the difference between expected market return and risk-free rate

Market risk premium = Rm - Rf, where Rm - Market Return, Rf - Risk-free rate

Reward to risk ratio is the market risk premium per a unit of market risk, measured by beta.

Reward to risk ratio = (Rp - Rf) / Beta

There are difference between the two as can be clearly seen from the formula. Market risk premium is simply the diference between returns of market and risk-free asset. While reward to risk ratio is a ratio of difference in expected return for a portfolio and risk-free rate to beta of the portfolio.