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Using the historical risk premiums as your guide, what is your estimate of the expected annual...

Using the historical risk premiums as your guide, what is your

estimate of the expected annual HPR on the market index stock

portfolio if the current risk-free interest rate is 3%?

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Answer #1

If we are taking the current risk free interest rate as 3%, then any market index stock which I will be generally preferring would be related to highly aggressive and volatile stock which will be having a beta of higher than 1 like Apple .

Beta of Apple is 1.28 and market rate of return I would be expecting under current situation would be based upon the historical risk premium and it is around 8% because of the given downward trajectory of the economy due to coronavirus.

Hence expected rate of return will be=

Risk free rate of return+beta (market rate of return- risk free rate of return)

=(3+1.28(8-3)

=3*1.28(5)

=9.4%

Hence I will be expecting a rate of return of 9.4 %.

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