The market has an expected rate of return of 12.4%. Long-term government bonds are expected to yield 6.8% and Treasury bills are expected to yield 4.2%. The inflation rate is 3.8%. What is the market risk premium?
A) 5.6%
B) 6.4%
C) 8.2%
D) 8.6%
E) 11.0%

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 4.2% in this case. Therefore, the market risk premium = 12.4% - 4.2% = 8.2%.

The Market Has an Expected Rate of Return of 12