Question

1. What does “the market risk premium” mean? Group of answer choices:

a) The risk-free rate

b) The relative performance of U.S. stocks vs. those of other countries

c) The expected return of the S&P 500 over the next year

d) The extra return an investor expects for accepting the risk of the S&P 500

e) The CAPM required return on an investment minus the risk-free rate

2. Your portfolio consists of two assets: $10,500 of Intel's corporate bonds and $15,700 of Microsoft stock. The standard deviations of returns for Intel's bonds and Microsoft stock are 12% and 27%, respectively. The correlation between these two investments is 0.33. What is the standard deviation of your portfolio?

Answer 1

1. Market risk premium: it is the extra return over & above the expected return on the market. For example: S&P500 Index in the USA, Nifty in India.

Capital Asset pricing model:

As per CAPM model:

Re= Rf+(Rm-Rf)B

Re= required rate of return.

Rf= Risk-free rate.

Rm = Return on market.

Rm-Rf =Market Risk Premium.

B = Beta, systematic risk.

Answer d) The extra return an investor expects for accepting the risk of the S&P 500.

2. Standard deviation of the portfolio = 18.35%