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 | 2024 | 2023 | 2022 | 2021 | 2020 | |
|---|---|---|---|---|---|---|
| Financial Ratios | ||||||
| Retention rate | 0.63 | 0.65 | 0.66 | 0.68 | 0.43 | |
| Profit margin | 12.19% | 11.75% | 11.64% | 13.31% | 8.16% | |
| Asset turnover | 0.71 | 0.72 | 0.74 | 0.67 | 0.61 | |
| Financial leverage | 2.69 | 2.83 | 2.87 | 2.93 | 3.15 | |
| Averages | ||||||
| Retention rate | 0.61 | |||||
| Profit margin | 11.41% | |||||
| Asset turnover | 0.69 | |||||
| Financial leverage | 2.90 | |||||
| Estimates | ||||||
| Market portfolio dividend growth rate1 | 13.98% | |||||
| Add: Market portfolio dividend yield2 | 0.90% | |||||
| Expected rate of return on market portfolio | 14.88% | |||||
| Less: Risk-free rate of return3 | 4.78% | |||||
| Market portfolio risk premium | 10.10% | |||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.61 × 11.41% × 0.69 × 2.90 = 13.98%
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)