Asked by Jocelyn Espericueta on Jul 23, 2024
Verified
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%
Market Risk Premium
The additional financial gain an investor looks to achieve by preferring a risk-laden market portfolio over risk-free investment options.
Expected Rate Of Return
The anticipated amount of profit or loss an investment is projected to generate based on historical or estimated future performance data.
Inflation Rate
The rate at which the general level of prices for goods and services is rising, subsequently eroding purchasing power.
- Calculate the market risk premium and understand its implications for investment decisions.
Verified Answer
KS
Kayla SmithJul 25, 2024
Final Answer :
D
Explanation :
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%.
Learning Objectives
- Calculate the market risk premium and understand its implications for investment decisions.