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 | 2024 | 2023 | 2022 | 2021 | 2020 | |
|---|---|---|---|---|---|---|
| Financial Ratios | ||||||
| Retention rate | 0.63 | 0.65 | 0.66 | 0.68 | 0.41 | |
| Profit margin | 11.73% | 11.40% | 11.41% | 12.96% | 7.65% | |
| Asset turnover | 0.73 | 0.74 | 0.76 | 0.69 | 0.62 | |
| Financial leverage | 2.68 | 2.80 | 2.84 | 2.91 | 3.14 | |
| Averages | ||||||
| Retention rate | 0.61 | |||||
| Profit margin | 11.03% | |||||
| Asset turnover | 0.71 | |||||
| Financial leverage | 2.87 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 13.63% | |||||
| Add: Market portfolio dividend yield2 | 1.38% | |||||
| Expected rate of return on market portfolio | 15.01% | |||||
| Less: Risk-free rate of return3 | 4.90% | |||||
| Market portfolio risk premium | 10.11% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.61 × 11.03% × 0.71 × 2.87 = 13.63%
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)