The market has an expected rate of return of 9.8%.The long-term government bond is expected to yield 4.5% and Treasury bills are expected to yield 3.4%.The inﬂation rate is 3.1%.What is the
Market risk premium?
A)2.2%
B)3.3%
C)5.3%
D)6.4%
E)6.7%

Question

Quizplus · Accepted Answer

Market risk premium is the difference between the expected rate of return on the market and the risk-free rate of return.

Market risk premium = Expected rate of return on the market - Risk-free rate of return
= 9.8% - 4.5%
= 5.3%

Therefore, the market risk premium is 5.3%. The correct choice is (C).

The Market Has an Expected Rate of Return of 9