Risk-Premium on Market Portfolio

Market risk premium or the risk premium on market portfolio is the difference between the expected return on the market portfolio and the risk-free rate of return. The CAPM holds that in equilibrium, the market portfolio is the unanimously desirable risky portfolio, It contains all securities in exactly the same proportion in which they are supplied, that is, each security is held in proportion to its market value. It is an efficient portfolio, which entails neither lending nor borrowing. The risk premium on the market portfolio is proportional to its risk and the degree of n’sk aversion of the average investor.

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