The market portfolio's historical returns for the past three years were 10 percent, 10 percent, and 16 percent. Suppose the risk-free rate of return is 4 percent. Estimate the market risk premium.

Question

Quizplus · Accepted Answer

The market risk premium is calculated as the average return of the market portfolio minus the risk-free rate. The average return of the market portfolio is (10% + 10% + 16%) / 3 = 12%. Subtracting the risk-free rate of 4% from this gives a market risk premium of 8%.

The Market Portfolio's Historical Returns for the Past Three Years