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The average annual return on the S&P 500 Index from 1986 to 1995 was 15.8 percent. The average annual T-bill yield during the same period was 5.6 percent. What was the market risk premium during these ten years?

Respuesta :

Answer:

10.20%

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

where.

The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.

So, the market risk premium would be

= Average annual return - average annual t-bill yield

= 15.8% - 5.6%

= 10.20%

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