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 2017 2016 2015 2014 2013
Ratios
Retention rate 0.51 0.51 0.50 0.58 0.64
Profit margin 9.51% 9.48% 9.06% 9.33% 10.14%
Asset turnover 0.67 0.68 0.70 0.77 0.77
Financial leverage 2.84 2.84 2.78 2.70 2.57
Averages
Retention rate 0.55
Profit margin 9.50%
Asset turnover 0.72
Financial leverage 2.74
Estimates
Market portfolio dividend growth rate1 10.25%
Add: Market portfolio dividend yield2 2.14%
Expected rate of return on market portfolio 12.39%
Less: Risk-free rate of return3 3.31%
Market portfolio risk premium 9.08%

1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.55 × 9.50% × 0.72 × 2.74 = 10.25%

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)