If you were to estimate the expected return on the market portfolio, you would need to know or estimate:
A) the beta of the portfolio, the risk-free rate, and the level of the market over the next year.
B) the risk-free rate and beta of the portfolio.
C) the historical risk premium and the risk free rate.
D) the level of the market over the next year, the risk-free rate, and the historical risk premium.

Question

Quizplus · Accepted Answer

DTo estimate the expected return on the market portfolio, you need to know the risk-free rate and the historical risk premium. The risk-free rate is the return on an investment with no risk, typically represented by government bonds. The historical risk premium is the additional return over the risk-free rate that investors demand for taking on the higher risk of investing in the stock market. Both C and D options include these essential components, with D also mentioning the level of the market over the next year, which can be useful for more specific forecasting.

If You Were to Estimate the Expected Return on the Market