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 | 2025 | 2024 | 2023 | 2022 | 2021 | |
|---|---|---|---|---|---|---|
| Financial Ratios | ||||||
| Retention rate | 0.70 | 0.63 | 0.65 | 0.66 | 0.68 | |
| Profit margin | 14.10% | 12.19% | 11.76% | 11.64% | 13.33% | |
| Asset turnover | 0.70 | 0.72 | 0.73 | 0.75 | 0.68 | |
| Financial leverage | 2.55 | 2.66 | 2.79 | 2.83 | 2.90 | |
| Averages | ||||||
| Retention rate | 0.66 | |||||
| Profit margin | 12.61% | |||||
| Asset turnover | 0.71 | |||||
| Financial leverage | 2.75 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 16.41% | |||||
| Add: Market portfolio dividend yield2 | 1.04% | |||||
| Expected rate of return on market portfolio | 17.45% | |||||
| Less: Risk-free rate of return3 | 5.20% | |||||
| Market portfolio risk premium | 12.25% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.66 × 12.61% × 0.71 × 2.75 = 16.41%
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)