is 5.19 a reasonable market risk premium? please explain
is 5.19 a reasonable market risk premium? please explain
Homework Answers
Yes the 5.19 is a reasonable risk premium because as per the trend analysis of the previous periods the reasonable market risk period should be between 3.5 % to 5.5% and it is the difference between the historical market risk premium and the expected Market risk premium., explained below.
The trend analysis of market risk premium is based on the below mentioned three factors.
1. Portfolio.
2. Equity.
3. Risk free rate of return.
And, Market risk premium involves three major factors.
1. Required Risk Premium - return totally depends upon the risk free rate and there are always a uncertainties in the equity investments so the investor can't ignore these uncertainties.
2. Expected Market risk premium - It tell us the difference between the variance in the return due to the expectations of the investor is higher than the real situation.
3. Historical Market risk premium - It helps identifying the historical variance of return from market and the risk free return on investment.
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