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22 May, 02:36

The average annual return on the S&P 500 Index from 1996 to 2005 was 20.36 percent. The average annual T-bill yield during the same period was 3.36 percent. What was the market risk premium during these ten years?

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  1. 22 May, 06:04
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    17%

    Explanation:

    We know that the Capital Asset Pricing Model (CAPM) formula would be

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    where,

    (Market rate of return - Risk-free rate of return) = Market risk premium

    20.36% - 3.36% = Market risk premium

    So, the market risk premium would be 17%
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