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

Question

Quizplus · Accepted Answer

The market risk premium is calculated as the average market return minus the risk-free rate. The average market return over the past three years is (10% + 10% + 16%) / 3 = 12%. Therefore, the market risk premium is 12% - 4% = 8%.

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