The market risk premium is computed by:
A)adding the risk-free rate of return to the inﬂation rate.
B)adding the risk-free rate of return to the market rate of return.
C)subtracting the risk-free rate of return from the inﬂation rate.
D)subtracting the risk-free rate of return from the market rate of return.
E)multiplying the risk-free rate of return by a beta of 1.0.

Question

Quizplus · Accepted Answer

The market risk premium is the additional return over the risk-free rate that investors expect to receive for taking on the risk of investing in the overall stock market. It is calculated as the difference between the market rate of return and the risk-free rate of return. Therefore, the correct answer is D, which is subtracting the risk-free rate of return from the market rate of return.

The Market Risk Premium Is Computed By