Stock Analysis on Net
Stock Analysis on Net

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’s uncertainty.


Market Portfolio, PRAT model

Microsoft Excel LibreOffice Calc
Average 2019 2018 2017 2016 2015
Financial Ratios
Retention rate 0.55 0.54 0.52 0.52 0.51
Profit margin 10.67% 10.22% 10.21% 10.04% 9.66%
Asset turnover 0.67 0.69 0.66 0.67 0.68
Financial leverage 2.94 2.86 2.80 2.76 2.72
Averages
Retention rate 0.53
Profit margin 10.16%
Asset turnover 0.67
Financial leverage 2.82
Estimates
Market portfolio dividend growth rate1 10.18%
Add: Market portfolio dividend yield2 1.78%
Expected rate of return on market portfolio 11.95%
Less: Risk-free rate of return3 1.27%
Market portfolio risk premium 10.68%

1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.53 × 10.16% × 0.67 × 2.82 = 10.18%

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)