Asked by Justin Berry on Jul 12, 2024
Verified
The market has an expected rate of return of 11.4%. The long-term government bond is expected to yield 5.4% and the U.S. Treasury bill is expected to yield 4.6%. The inflation rate is 3.9%. What is the market risk premium?
A) 6.0%
B) 6.8%
C) 7.5%
D) 8.5%
E) 9.3%
Market Risk Premium
The extra profit an investor is aiming for by choosing to invest in a market portfolio that carries risk instead of opting for assets devoid of any risk.
Government Bond
A type of investment where an investor loans money to a government in exchange for periodic interest payments plus the return of the bond's face value at maturity.
Treasury Bill
A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less.
- Grasp the concepts of market risk premium, risk-free rate, and their roles in the investment decision-making process.
Verified Answer
DM
Daniel MartinJul 14, 2024
Final Answer :
B
Explanation :
The market risk premium is calculated as the expected rate of return on the market minus the risk-free rate. The U.S. Treasury bill is often used as the risk-free rate in these calculations. Therefore, the market risk premium = 11.4% - 4.6% = 6.8%.
Learning Objectives
- Grasp the concepts of market risk premium, risk-free rate, and their roles in the investment decision-making process.