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%

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 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%.

The Market Has an Expected Rate of Return of 11