Question

The average annual return on the S&P 500 Index from 1996 to 2005 was 20.36 percent. The average annual T-bill yield during the same period was 3.36 percent. What was the market risk premium during these ten years?

Answer 1

17%

Step-by-step explanation:

We know that the Capital Asset Pricing Model (CAPM) formula would be

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

where,

(Market rate of return - Risk-free rate of return) = Market risk premium

20.36% - 3.36% = Market risk premium

So, the market risk premium would be 17%