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 | 0.42 | |
| Profit margin | 11.44% | 11.17% | 11.19% | 12.65% | 7.59% | |
| Asset turnover | 0.74 | 0.75 | 0.77 | 0.70 | 0.63 | |
| Financial leverage | 2.69 | 2.81 | 2.85 | 2.92 | 3.14 | |
| Averages | ||||||
| Retention rate | 0.61 | |||||
| Profit margin | 10.81% | |||||
| Asset turnover | 0.72 | |||||
| Financial leverage | 2.88 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 13.59% | |||||
| Add: Market portfolio dividend yield2 | 1.28% | |||||
| Expected rate of return on market portfolio | 14.87% | |||||
| Less: Risk-free rate of return3 | 4.56% | |||||
| Market portfolio risk premium | 10.31% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.61 × 10.81% × 0.72 × 2.88 = 13.59%
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)