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.
Average | 2023 | 2022 | 2021 | 2020 | 2019 | |
---|---|---|---|---|---|---|
Financial Ratios | ||||||
Retention rate | 0.65 | 0.67 | 0.68 | 0.37 | 0.54 | |
Profit margin | 10.96% | 10.88% | 12.21% | 7.04% | 9.30% | |
Asset turnover | 0.77 | 0.79 | 0.71 | 0.63 | 0.69 | |
Financial leverage | 2.78 | 2.82 | 2.88 | 3.08 | 2.97 | |
Averages | ||||||
Retention rate | 0.58 | |||||
Profit margin | 10.08% | |||||
Asset turnover | 0.72 | |||||
Financial leverage | 2.91 | |||||
Estimates | ||||||
Market portfolio dividend growth rate1 | 12.20% | |||||
Add: Market portfolio dividend yield2 | 1.22% | |||||
Expected rate of return on market portfolio | 13.42% | |||||
Less: Risk-free rate of return3 | 4.67% | |||||
Market portfolio risk premium | 8.75% |
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.58 × 10.08% × 0.72 × 2.91 = 12.20%
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)