The historical returns data for the past three years for Stock B and the stock market portfolio are: Stock B: 24%, 0%, 24%, Market Portfolios: 10%, 12%, 20%. If the risk-free rate is 4%, calculate the market risk premium.
A) 18.1%
B) 14%
C) 10%
D) None of the above

Question

Quizplus · Accepted Answer

The market risk premium is calculated as the average return of the market portfolio minus the risk-free rate. The average return of the market portfolio is (10% + 12% + 20%) / 3 = 14%. Therefore, the market risk premium is 14% - 4% = 10%.

The Historical Returns Data for the Past Three Years for Stock