- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 1. Portfolio Risk and Return: Part I
- Subject 1. Historical Return and Risk
CFA Practice Question
The market portfolio of common stocks earned 20.4% last year. Treasury bills earned 5.3% on average last year. The average inflation rate was 2.5%. What was the real risk premium on equities?
B. 22.9%
C. 12.6%
A. 15.1%
B. 22.9%
C. 12.6%
Correct Answer: A
20.4 - 5.3 = 15.1 or (20.4-2.5) - (5.3-2.5) = 15.1
User Contributed Comments 5
| User | Comment |
|---|---|
| ricksy | the portfolio return is the average of 0 risk investments and risky investments so subracting the degree of real risk free rate from the average portfolio rate gives the rate of risk premium on the equities |
| george2006 | If so, then there is no difference between the REAL risk premium vs. NOMINAL risk premium because REAL RP = REAL return - REAL risk free rate NOMINAL RP = Nominal return - Nominal risk free rate If so, why bother using the real vs nominal risk premium. |
| nike | No george, that's not true. In this case, real RP was 15.1%, inflation premium was 2.5%, risk-free rate was 5.3 - 2.5 = 2.8%. |
| viruss | This is a typical exam question when you go too fast because it's seems pretty easy and you fall for the pitfall ;) |
| johntan1979 | This question again tests our understanding of the CAPM model. Don't say why bother. There is always a purpose to why a question is asked. |