Banks are currently using 8% market risk premium. Data as of Feb, 2013.
If the required rate of return is 11 the risk free rate is 7 and the market risk premium is 4 If the market risk premium increased to 6 percent what would happen to the stocks required rate of return?
When one has market risk premium he/she is willing to take an financial risk. The risk premium is how much value stocks should return over a risk-free investment. Stocks are considered a higher financial risk (and possible a faster gain) opposed to, for instance, bonds.
The current estimated market risk premium of Australia is 8 percent. This is within the regulatory period January 2010 to June 2014.
Risk premium = Company's risk (standard deviation of the historical stock returns of the market as a whole) - Risk-free rate of return (standard deviation of the historical treasury bonds' returns) - Inflation
No- the market risk premium is the slope of the Security Market Line (SML).
There is a calculator on the Internet at the site referenced below.
I'm going to assume that you mean the risk free rate is 4%, or 0.04, and the market rate of return is 14%, or .14. If that is the case, then we solve: Market Rate of Return = (Risk Free Rate) + Beta * (Market Risk Premium) 0.14 = 0.04 + 1.2 * MRP 0.1 = 1.2 * MRP 0.1 / 1.2 = MRP 0.08333... = MRP The Market Risk Premium would be approximately 8.33% This is an example of the Capital Asset Pricing Model, or CAPM.
Expected return= risk free rate + Risk premium = 11 rate of return on stock= Riskfree rate + beta x( expected market return- risk free rate)
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
Value of the common stock will go down.As market becomes riskier market participants adjust expected risk premium and start to demand higher returns, consequently they begin to sell stocks as they do not satisfy their newly adjusted expected risk premium. As a result stock price goes down.
RoR = Rf + beta x Rp where, RoR = Required Rate of return Rf = Risk free Rate Rp = Risk Premium so Ror - 19%