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cupoosta [38]
1 year ago
14

The market has an expected rate of return of 9.8 percent. The current nominal expected yield on U.S. Treasury bills is 3.1 perce

nt. The inflation rate is 1.7 percent.
What is the market risk premium?
(round answer to whole number with two decimal points: i.e., use 1.23 percent instead of 0.0123)
Business
1 answer:
schepotkina [342]1 year ago
3 0

The market risk premium is 6.00% if the market's expected rate of return is 9.8%. The nominal expected yield on US Treasury bills right now is 3.1%. There is a 1.7 percent inflation rate.

Formula

Market risk premium equals expected return on the market minus the yield on US Treasury bills.

Calculation in Step 2

Market risk premium is equal to 9.80 cents per dollar minus 3.80 cents per dollar, which equals 6.40 cents per dollar.

Consequently, the market risk premium is 6.00%.

Between the anticipated return on a market portfolio and the risk-free rate is the market risk premium (MRP).

A graphical representation of the capital asset pricing model, the security market line (SML), shows that the slope equals the market risk premium. Modern portfolio theory (MPT) and discounted cash flows (DCF) valuation both use the CAPM to calculate the required rate of return on equity investments.

Learn more about market risk premium here

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