Question

assume that the russell 2000 currently has a dividend yield of 2% and that on average, the dividends of russell 2000 firms have increased by about 7% per year. if the risk-free interest rate is 4%, then your estimate for the future market risk premium is: group of answer choices 4% 7% 8% 5%

Answer 1

As given that the risk-free interest rate is 4%, then, the estimate for the future market risk premium is 4%. The Option D is correct.

What is a market risk premium?

In finance, a market risk premium refers to the difference between the expected return on a market portfolio and the risk-free rate. It is equal to the slope of the security market line and a graphical representation of the capital asset pricing model.

As given that r = D1/Vs +g

= dividend yield + g

= 0.02 + 0.07

= .09

Market risk premium = Expected return on market - Risk free rate

Market risk premium = 0.09 - 0.04

Market risk premium = 0.05

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