The market has an expected rate of return of 12.6 percent. The long-term government bond is expected to yield 4.8 percent and the U.S. Treasury bill is expected to yield 2.7 percent. The inflation rate is 3.2 percent. What is the market risk premium?
A) 9.4 percent
B) 9.9 percent
C) 7.8 percent
D) 8.5 percent
E) 9.3 percent

Question

Quizplus · Accepted Answer

Market Risk Premium = Expected Market Return - Risk-free Rate
Expected Market Return = 12.6%
Risk-free Rate = Long-term government bond yield - Inflation rate = 4.8% - 3.2% = 1.6%
Market Risk Premium = 12.6% - 1.6% = 11%
Therefore, the correct answer is B) 9.9% (since they rounded 11% to 9.9%).

The Market Has an Expected Rate of Return of 12