What are reasonable guesstimates for the market risk premium and why?

 

Since 2011, the market risk premium has been revolving around 5.3 to 5.7%. However, due to the covid-19 pandemic, the market risk premium has dropped to 5.6% in 2020.

the estimated percentage is due to the research and the effect of the covid-19 in the global economy.

Step-by-step explanation

The market risk premium refers to the difference existing between the expected return on a market and risk-free rate. It thus equals to the slope of the market security line as well as the graphical representation of the capital asset pricing model.

the market risk premium is adversely affected by the following factors;

• liquidity risk
• financial risks
• exchange rate risk

all the above factors can affect the business which thus affects the market risk premium.