Collectibles Corp. has a beta of 3.25 and a standard deviation of returns of 27%. The return on the market portfolio is 13% and the risk free rate is 5%. What is the risk premium on the market

Risk Premium on the market is 8%

Explanation:

Given beta = 3.25, Standard deviation = 27%, Market Return = 13%, Risk Free rate = 5% MRP=?

The risk premium on the market is the difference between the return on the market which is usually denoted by some stock market index return and the risk free rate

Market risk Premium = Market Return - Risk free rate

=13% - 5%

=8%

The risk premium on the market is 8%

Explanation:

In solving this example given, we define the method called market risk premium.

Market Risk Premium:

The market risk premium is the difference between the risk free rate and average market return. The market return is often estimated by the return on some market stock index, known as the S&P 500 index

Therefore we apply the capital asset pricing model to compute the market risk premium as follows:

The return of the market portfolio = 13%

The risk free rate = 5%

market risk premium = market return - risk free rate

market risk premium = 13% - 5%

market risk premium = 8%