CFA Practice Question

There are 294 practice questions for this study session.

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?

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.
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