Market Portfolio Risk Premium
The risk premium (RP) is the increase over the nominal risk-free rate of return that investor demand as compensation for an investment uncertainty.
Market Portfolio, PRAT model
| Average | 2023 | 2022 | 2021 | 2020 | 2019 | |
|---|---|---|---|---|---|---|
| Financial Ratios | ||||||
| Retention rate | 0.64 | 0.66 | 0.68 | 0.42 | 0.52 | |
| Profit margin | 11.30% | 11.30% | 12.73% | 7.79% | 9.51% | |
| Asset turnover | 0.75 | 0.77 | 0.70 | 0.63 | 0.67 | |
| Financial leverage | 2.81 | 2.85 | 2.91 | 3.14 | 3.06 | |
| Averages | ||||||
| Retention rate | 0.58 | |||||
| Profit margin | 10.52% | |||||
| Asset turnover | 0.70 | |||||
| Financial leverage | 2.96 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 12.81% | |||||
| Add: Market portfolio dividend yield2 | 1.05% | |||||
| Expected rate of return on market portfolio | 13.86% | |||||
| Less: Risk-free rate of return3 | 4.90% | |||||
| Market portfolio risk premium | 8.96% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.58 × 10.52% × 0.70 × 2.96 = 12.81%
2 Market portfolio dividend yield = Next year expected market portfolio dividends ÷ Current market portfolio price
3 Rate of return on LT Treasury Composite (risk-free rate of return proxy)