the market has an expected rate of return of 9.8 percent. the long-term government bond is expected to yield 4.5 percent and the u.s. treasury bill is expected to yield 3.4 percent. the inflation rate is 3.1 percent. what is the market risk premium?

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25-10-2022
Business

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the market has an expected rate of return of 9.8 percent. the long-term government bond is expected to yield 4.5 percent and the u.s. treasury bill is expected to yield 3.4 percent. the inflation rate is 3.1 percent. what is the market risk premium?

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SanofarAfrin SanofarAfrin · Answer 1 · 2022-10-27T16:46:02+02:00

The premium for market risk is 6.40%. The term "market risk premium" refers to the deviation between the expected return on a market portfolio and the risk-free rate (MRP).

How does market risk premium work?

Between the anticipated return on a market portfolio and the risk-free rate is the market risk premium (MRP). A graphical illustration of the capital asset pricing model, the security market line (SML), shows that the slope equals the market risk premium (CAPM).

The extra return an investment generates above the risk-free rate of return is known as the market risk premium. It is determined by subtracting the market rate of return from the risk-free rate of return.

The formula for calculating market risk premium is displayed below:

Market risk premium = Expected rate of return - U.S. Treasury bill yield

Market risk premium = 9.80% - 3.40%

Market risk premium = 6.40%

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