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    Calculating market risk premium

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    What is the market risk premium if the risk free rate is 5% and the expected market return is given as follows

    State of Nature Probability Return
    Boom 20% 30%
    Average 70% 15%
    Recession 10% -5%

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    Solution Preview

    Expected Return=Probability of boom * Return in case of boom + Probability of average * ...

    Solution Summary

    The solution describes the steps to calculate market risk premium.