Accredited Wealth Management Advisor (AWMA) Exam 2 Practice Test

What is the market return if the risk-free rate is 6.5% and the market risk premium is 7%?

11.5% 12.5% 13.5% 14.5%

Correct Answer:

13.5%

Explanation:

The market return is found by adding the risk-free rate to the market risk premium. In CAPM, the expected return on the market portfolio equals Rf + ERP, where the market risk premium is the extra return investors require for taking on market risk. With a risk-free rate of 6.5% and a market risk premium of 7%, the market return is 6.5% + 7% = 13.5%. So the best answer is 13.5%. The other values would result from misinterpreting the numbers or mis-adding.

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