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 | 2022 | 2021 | 2020 | 2019 | 2018 | |
|---|---|---|---|---|---|---|
| Financial Ratios | ||||||
| Retention rate | 0.68 | 0.69 | 0.41 | 0.55 | 0.57 | |
| Profit margin | 11.42% | 12.66% | 7.37% | 9.56% | 9.77% | |
| Asset turnover | 0.79 | 0.71 | 0.63 | 0.69 | 0.71 | |
| Financial leverage | 2.81 | 2.87 | 3.09 | 2.98 | 2.88 | |
| Averages | ||||||
| Retention rate | 0.58 | |||||
| Profit margin | 10.16% | |||||
| Asset turnover | 0.71 | |||||
| Financial leverage | 2.93 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 12.12% | |||||
| Add: Market portfolio dividend yield2 | 1.41% | |||||
| Expected rate of return on market portfolio | 13.53% | |||||
| Less: Risk-free rate of return3 | 5.10% | |||||
| Market portfolio risk premium | 8.43% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.58 × 10.16% × 0.71 × 2.93 = 12.12%
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)