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 | |
|---|---|---|---|---|---|
| Financial Ratios | |||||
| Retention rate | 0.65 | 0.66 | 0.68 | 0.42 | |
| Profit margin | 11.19% | 11.21% | 12.67% | 7.61% | |
| Asset turnover | 0.75 | 0.77 | 0.70 | 0.63 | |
| Financial leverage | 2.81 | 2.85 | 2.92 | 3.14 | |
| Averages | |||||
| Retention rate | 0.60 | ||||
| Profit margin | 10.67% | ||||
| Asset turnover | 0.71 | ||||
| Financial leverage | 2.93 | ||||
| Estimates | |||||
| Market portfolio dividend growth rate1 | 13.42% | ||||
| Add: Market portfolio dividend yield2 | 1.01% | ||||
| Expected rate of return on market portfolio | 14.43% | ||||
| Less: Risk-free rate of return3 | 4.78% | ||||
| Market portfolio risk premium | 9.65% | ||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.60 × 10.67% × 0.71 × 2.93 = 13.42%
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)