Market risk premium: Market risk premium refers to the difference between the expected return on a market portfolio and the risk-free rate. It is equal to the slope of the security market line, which is a graphical representation of the Capital Asset Pricing Model (CAPM). Marker risk premium shows the relationship between the returns on equity market portfolio and Treasury bond yields. Risk-free rate of return is the return that an investor must demand for inflation and the time-value of money, even when there is hardly any risk of any financial loss. A market portfolio is a portfolio that comprises of several risky investments, with each individual investment in portfolio weighted in proportion to its value. To determine: The tradeoffs in estimating the market risk premium.

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Chapter 13, Problem 6CC

Summary Introduction

Market risk premium:

Market risk premium refers to the difference between the expected return on a market portfolio and the risk-free rate. It is equal to the slope of the security market line, which is a graphical representation of the Capital Asset Pricing Model (CAPM). Marker risk premium shows the relationship between the returns on equity market portfolio and Treasury bond yields.

Risk-free rate of return is the return that an investor must demand for inflation and the time-value of money, even when there is hardly any risk of any financial loss.

A market portfolio is a portfolio that comprises of several risky investments, with each individual investment in portfolio weighted in proportion to its value.

To determine:

The tradeoffs in estimating the market risk premium.

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