Excess return on the market portfolio

Excess return on the market portfolio

Difference between the return on the market portfolio and the riskless rate.

Excess Return on the Market Portfolio

The difference between the return on the market portfolio, a hypothetical portfolio of all securities, and the riskless rate of return, which is usually defined as the return on a 90-day Treasury bill. This may be taken as an indicator of how well (or poorly) the stock market is performing.
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Under the CAPM, a portfolio's cost of equity equals the riskless interest rate plus the product of the portfolio's beta and the expected excess return on the market portfolio. We assume that the expected excess return on each market portfolio proxy equals that portfolio's sample mean monthly excess return over the 75-year period from 1942 to 2016.
I assume that the excess return on the market portfolio is normally distributed with mean [E.sub.m] and variance [V.sub.m], where [E.sub.m] and [V.sub.m] are the entries for the mean and variance of the market portfolio in the vector of mean excess returns and the variance-covariance matrix described above.