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 | |
|---|---|---|---|---|---|
| Financial Ratios | |||||
| Retention rate | 0.63 | 0.65 | 0.66 | 0.68 | |
| Profit margin | 12.22% | 11.77% | 11.65% | 13.34% | |
| Asset turnover | 0.72 | 0.73 | 0.75 | 0.68 | |
| Financial leverage | 2.67 | 2.80 | 2.84 | 2.90 | |
| Averages | |||||
| Retention rate | 0.66 | ||||
| Profit margin | 12.24% | ||||
| Asset turnover | 0.72 | ||||
| Financial leverage | 2.80 | ||||
| Estimates | |||||
| Market portfolio dividend growth rate1 | 16.13% | ||||
| Add: Market portfolio dividend yield2 | 1.25% | ||||
| Expected rate of return on market portfolio | 17.38% | ||||
| Less: Risk-free rate of return3 | 4.79% | ||||
| Market portfolio risk premium | 12.59% | ||||
1 Market portfolio dividend growth rate = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.66 × 12.24% × 0.72 × 2.80 = 16.13%
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)