Question

In: Finance

The expected market risk premium is difficult to predict, but theoretically, we know that it depends...

The expected market risk premium is difficult to predict, but theoretically, we know that it depends on:

A. the amount of investors in the market

B. the market's level of greed and fear

C. the market's level of risk aversion and volatility

D. the market's perception of future prospects

Solutions

Expert Solution

OPTION C

Market Risk Premium is the difference between the risk free rate and the expected return from the market which the investor expects. In other words it is the extra return that the investor expects on his security. It is an important part of Modern Portfolio Theory. The slope of the security market line (S.M.L) is represented by Market Risk Premium which is a representation of the Capital Asset Pricing Model (C.A.P.M.). It depends on the market's level of risk aversion and volatility. Because the risk free rate measures the level of risk aversion an investor is willing to take and market return represents volatility. Hence the most important factor on which risk premium depends in nothing but the level of risk aversion and volatility.

jeff jeffy answered 3 years ago
Next > < Previous

Related Solutions

1.    If the risk-free rate is 6.9%, the market risk premium is 7.0%, and the expected return...
1.    If the risk-free rate is 6.9%, the market risk premium is 7.0%, and the expected return on Security J is 29.4%, what is the beta for Security J? (Calculate your answer to two decimal places.) Title: Preferred stock (solve for value) 2.    Timeless Corporation issued preferred stock with a par value of $700. The stock promised to pay an annual dividend equal to 19.0% of the par value. If the appropriate discount rate for this stock is 10.0%, what is the...
MT. 1)With a risk-free rate of 4.2% and a market risk-premium of 8.7%, a stock's expected...
MT. 1)With a risk-free rate of 4.2% and a market risk-premium of 8.7%, a stock's expected rate of return is 10.4%. The following year, the market-risk premium decreases by 1% but the stock's beta and the risk-free rate remain the same. What will be the expected rate of return on the stock for that year? Answer as a percent return to the nearest hundredth of a percent as in xx.xx without entering a percent symbol.  For negative returns include a negative...
Q4 1.With a risk-free rate of 2.4% and a market risk-premium of 8.6%, a stock's expected...
Q4 1.With a risk-free rate of 2.4% and a market risk-premium of 8.6%, a stock's expected rate of return is 10.7%. The following year, the market-risk premium decreases by 1% but the stock's beta and the risk-free rate remain the same. What will be the expected rate of return on the stock for that year? Answer as a percent return to the nearest hundredth of a percent as in xx.xx without entering a percent symbol.  For negative returns include a negative...
Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%,...
Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. The firm maintains a constant growing dividend policy that grows at 5% per year ; the most recent dividend was $1.8. Currently stock price is $21. Multiple Choice To find cost of equity using...
Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%,...
Suppose a firm has a beta of 1.5.The market risk premium is expected to be 8%, and the current risk-free rate is 2%. The firm maintains a constant growing dividend policy that grows at 5% per year ; the most recent dividend was $1.8. Currently stock price is $21. Multiple Choice If you use dividend growth model to estimate cost of equity, D1 is $1.8 If you use dividend growth model to estimate cost of equity, D1 is not $1.8
Throughout this problem assume that the expected market risk premium is 4% with a standard deviation...
Throughout this problem assume that the expected market risk premium is 4% with a standard deviation of 20% and that the risk-free interest rate is 0%. A stock has a beta of 2.1. Question: Explain what beta measures and compute the stock’s expected return.
Holding other factors in the Gordon model constant, if the market risk premium increases, the expected...
Holding other factors in the Gordon model constant, if the market risk premium increases, the expected price of the stock would fall." True or false?
Lexton limited has anequity beta of 1.10. the market risk premium in zambia is expected to...
Lexton limited has anequity beta of 1.10. the market risk premium in zambia is expected to be 5% and the yield on government bonds is currently trading at K94.50 . The coupon rate is 8%. The maturity date is five years time and the corporation tax is rate is 28% . interest is payable annually in arrears , the company has just paid the coupon interest for the current year a) what is lextons cost of equity based on the...
Suppose that Treasury bills offer a return of about 6% and the expected market risk premium...
Suppose that Treasury bills offer a return of about 6% and the expected market risk premium is 8.5%. The standard deviation of Treasury-bill returns is zero and the standard deviation of market returns is 20%. Use the formula for portfolio risk to calculate the standard deviation of portfolios with different proportions in Treasury bills and the market. (Note: The covariance of two rates of return must be zero when the standard deviation of one return is zero.) Graph the expected...
What are the differences among the Market return, the Market risk premium, the Market risk price,...
What are the differences among the Market return, the Market risk premium, the Market risk price, and the return on an individual asset or a portfolio of assets versus the asset’s or portfolio’s risk premium?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT