- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 52. Portfolio Risk and Return: Part I
- Subject 3. Historical Return and Risk

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**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

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**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. |