Market Risk Premium 2025: Guide for Australian Investors

How much extra return should you expect for taking on the risks of the share market? That’s the puzzle at the heart of the market risk premium—a number that shapes asset prices, super fund returns, and your investment decisions. In 2025, with global and domestic shifts shaking up markets, understanding this premium is more relevant than ever for Australian investors.

What Is the Market Risk Premium—and Why Does It Matter?

The market risk premium (MRP) is the additional return investors demand for choosing riskier shares over risk-free assets like government bonds. It’s a key input in valuing companies, setting discount rates, and making investment decisions. Essentially, it’s the reward for taking on the unpredictability of the stock market.

• MRP = Expected Market Return – Risk-Free Rate

• The risk-free rate in Australia is typically pegged to 10-year Commonwealth Government bonds.

• The MRP influences everything from superannuation fund projections to the cost of capital for businesses.

For example, if the expected return on the ASX 200 is 8% and the 10-year government bond yields 4%, the implied MRP is 4%. This figure guides fund managers, CFOs, and everyday investors in evaluating whether equities are worth the risk compared to safer alternatives.

2025 Update: How Policy and Market Forces Are Shaping Australia’s MRP

The MRP is not static. It shifts with economic cycles, monetary policy, and investor sentiment. In 2025, several factors are influencing the Australian MRP:

• Interest Rate Trajectory: The Reserve Bank of Australia has signalled a pause in rate hikes, holding the cash rate at 4.35% as inflation slows. This steadier policy has helped stabilise government bond yields, impacting the risk-free baseline.

• Global Economic Volatility: Ongoing geopolitical tensions and uneven global growth have kept equity volatility elevated. Investors are demanding higher compensation for market risk, nudging up the MRP.

• Superannuation Fund Pressures: As Australia’s superannuation pool surpasses $3.7 trillion, funds are reassessing long-term return assumptions. Several major industry funds have lifted their internal MRP assumptions to 5–6% for Australian equities in 2025, reflecting a more cautious outlook on future returns.

• Tax Policy Adjustments: The Albanese government’s stage 3 tax cuts, effective July 2024, have marginally increased after-tax returns for many investors, but with muted impact on overall risk appetite.

Real-world example: In its 2025 annual report, AustralianSuper adjusted its strategic asset allocation models to use a 5.5% MRP, citing higher global uncertainty and the likelihood of only gradual economic recovery. This compares to 4.5% used in much of the previous decade.

Why the Market Risk Premium Matters for Your Portfolio

Whether you’re a DIY investor, property enthusiast, or business owner, the MRP quietly influences your financial decisions:

• Valuing Shares: The higher the MRP, the lower the present value of future earnings—meaning growth stocks can look less attractive when risk premiums rise.

• Superannuation Returns: Long-term projections for super balances depend on assumed market returns, which are built on the MRP. A shift from 4% to 6% can meaningfully alter expected retirement outcomes.

• Home Loan and Business Funding: Lenders and analysts use the MRP to assess the cost of equity for banks and major corporates, influencing lending rates and investment appetite.

For instance, a higher MRP in 2025 has contributed to more conservative business valuations in tech and property sectors, with many listed companies trading below their 2021–22 highs despite stable earnings.

How to Respond: Practical Tips for Australian Investors

• Review Your Expected Returns: Adjust your portfolio projections to reflect a higher or more volatile MRP—especially if you’re relying on equities for long-term goals.

• Diversify: A rising MRP often signals more uncertainty ahead. Spreading investments across asset classes (shares, bonds, property, alternatives) can help manage risk.

• Stay Informed: Keep an eye on RBA statements, super fund updates, and market forecasts. MRP assumptions can and do change with economic conditions.

Conclusion

The market risk premium is the invisible hand shaping the returns Australians can expect from the share market. In 2025, as economic policy and market forces shift, understanding the MRP’s impact is more important than ever. Whether you’re planning for retirement, managing your business’s finances, or just looking to make smarter investment choices, staying across this crucial metric can give you an edge in a changing world.