Question

If the expected rate of return for the market is not much greater than the risk-free rate of return, what does this suggest about the general level of compensation for bearing systematic risk

Answer 1

the expected rate of return of an investment is calculated using the following formula:

Re = risk free + beta x (market risk - risk free)

market risk - risk free = risk premium

another way of calling market risk is systematic risk

the beta for the whole market is 1, so we can simplify the equation:

market Re = risk free + risk premium

If the expected rate of return is barely above the risk free rate, that means that the market risk (or systematic risk) is not very high, therefore, resulting in a low risk premium. I.e. market risk is very low, probably because the economy is doing very well in general terms and the inflation rate is probably also very low.