Question

what is the market risk premium if the expected return on the market is 12.25 percent, the risk-free rate is 4.77 percent, and inflation is 3.16 percent?(round the value to 100th decimal and please enter the value only without converting it to a decimal format. if the answer is 8.55%, enter 8.55)

Answer 1

The market risk premium is calculated by subtracting the risk-free rate from the expected market return, resulting in 7.48%.

Step-by-step explanation:

The market risk premium is the difference between the expected return on the market portfolio of investments and the risk-free rate of return. It compensates investors for taking on the higher risk of investing in the stock market compared to risk-free investments. Given an expected market return of 12.25 percent and a risk-free rate of 4.77 percent, the calculation for the market risk premium would not incorporate inflation directly since it is a nominal measure.

Therefore, the market risk premium is simply the expected return on the market minus the risk-free rate:

Market risk premium = Expected market return - Risk-free rate
Market risk premium = 12.25% - 4.77%
Market risk premium = 7.48%

Hence, the market risk premium is 7.48%.