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 | 0.65 | 0.67 | 0.68 | 0.39 | 0.52 | |
| Profit margin | 11.00% | 11.15% | 12.59% | 7.36% | 9.28% | |
| Asset turnover | 0.77 | 0.80 | 0.72 | 0.64 | 0.70 | |
| Financial leverage | 2.80 | 2.82 | 2.89 | 3.11 | 3.01 | |
| Averages | ||||||
| Retention rate | 0.58 | |||||
| Profit margin | 10.28% | |||||
| Asset turnover | 0.72 | |||||
| Financial leverage | 2.93 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 12.70% | |||||
| Add: Market portfolio dividend yield2 | 1.08% | |||||
| Expected rate of return on market portfolio | 13.79% | |||||
| Less: Risk-free rate of return3 | 4.67% | |||||
| Market portfolio risk premium | 9.12% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.58 × 10.28% × 0.72 × 2.93 = 12.70%
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)