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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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The solution describes the steps to calculate market risk premium.

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

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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