ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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subtracting the risk-free rate of return from the inflation rate.
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subtracting the risk-free rate of return from the market rate of return.
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adding the risk-free rate of return to the market rate of return.
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adding the risk-free rate of return to the inflation rate.
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Detailed explanation-1: -The market risk premium can be calculated by subtracting the risk-free rate from the expected equity market return, providing a quantitative measure of the extra return demanded by market participants for the increased risk. Once calculated, the equity risk premium can be used in important calculations such as CAPM .
Detailed explanation-2: -Market risk premium = expected rate of return – risk free rate of returnread more represents the slope of the security market line. It gives the market’s expected to return at different levels of systematic or market risk.
Detailed explanation-3: -Market risk premium is the difference between the forecasted return on a portfolio of investments and the risk-free rate. Since Treasuries are considered the risk-free rate, the market risk premium for a portfolio is the variance between the returns on the portfolio and the chosen Treasury yield.
Detailed explanation-4: -Real Rf Rate = (1 + Nominal Rf Rate) / (1 + Inflation Rate) Nominal Rf Rate = (1 + Real Rf Rate) * (1 + Inflation Rate) – 1. Equity Risk Premium (ERP) = Expected Market Return – rf Rate.
Detailed explanation-5: -Market Risk Premium = Expected Return − Risk-free Rate. Market Risk Premium = Expected Return − Risk-free Rate. Real Market Risk Premium = (1 + Normal Premium Rate / 1 + Inflation Rate) − 1. 29-Sept-2022