The historical returns for the past three years for Stock B and the stock market portfolio are Stock B: 24 percent, 0 percent, 24 percent; market portfolio: 10 percent, 12 percent, 20 percent. If the risk-free rate is 4 percent, calculate the market risk premium.
A)18.1 percent
B)14.0 percent
C)10.0 percent
D)6.0 percent

Question

Quizplus · Accepted Answer

The market risk premium is calculated by subtracting the risk-free rate from the average return of the market portfolio. The average return of the market portfolio is (10% + 12% + 20%) / 3 = 14%. Subtracting the risk-free rate of 4% from this gives a market risk premium of 10%.

The Historical Returns for the Past Three Years for Stock