The market has an expected rate of return of 9.8%. Long-term government bonds are 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

The market risk premium is calculated as the expected rate of return on the market minus the risk-free rate. The risk-free rate is often represented by the yield on Treasury bills, which is 3.4% in this case. Therefore, the market risk premium = 9.8% - 3.4% = 6.4%.

The Market Has an Expected Rate of Return of 9