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 uncertainty.


Market Portfolio, PRAT model

Microsoft Excel
Average 2023 2022 2021 2020 2019
Financial Ratios
Retention rate 0.66 0.67 0.69 0.40 0.55
Profit margin 10.92% 10.95% 12.26% 7.14% 9.33%
Asset turnover 0.76 0.79 0.71 0.63 0.68
Financial leverage 2.78 2.82 2.87 3.07 2.97
Averages
Retention rate 0.59
Profit margin 10.12%
Asset turnover 0.71
Financial leverage 2.90
Estimates
Market portfolio dividend growth rate1 12.40%
Add: Market portfolio dividend yield2 1.22%
Expected rate of return on market portfolio 13.62%
Less: Risk-free rate of return3 4.55%
Market portfolio risk premium 9.07%

1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.59 × 10.12% × 0.71 × 2.90 = 12.40%

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)