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In: Finance

how do I work out the market risk premium for a company e.g. costco

how do I work out the market risk premium for a company e.g. costco

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Expert Solution

The market risk premium can be calculated by subtracting the risk-free rate from the expected equity market return, providing a quantitative measure of the extra return demanded by market participants for the increased risk

The market risk premium is the additional return an investor will receive (or expects to receive) from holding a risky market portfolio instead of risk-free assets.

The market risk premium is part of the Capital Asset Pricing Model (CAPM) which analysts and investors use to calculate the acceptable rate of return for an investment. At the center of the CAPM is the concept of risk (volatility of returns) and reward (rate of returns). Investors always prefer to have the highest possible rate of return combined with the lowest possible volatility of returns.

e.g. costco

In today’s world of shopping via smartphone and next-day delivery, Costco remains the largest warehouse retailer in the United States. Its secret is simple: Instead of trying to compete on margins alone, the company sells membership cards. And it sells a lot of them.

Costco's brick-and-mortar business model is still the heart of the operation. Everything is in a warehouse setting, and the selection is limited.

Pricing is unique to each store or area, and it is based as much on local members' shopping habits as it is on whatever deal Costco can negotiate.

The value of being a member comes from purchasing staples in bulk and maybe filling up your fuel tank on pantry-stocking trips.

The margins on those items are low, but Costco makes it work through high-volume selling and the membership system


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