In addition, Table 2 also includes the market price of risk, [sigma](Q)/E(Q); the conditional standard deviation of the market price of risk, std([sigma](Q)/E(Q)); the equity premium E([R.sup.e] - [R.sup.f]), the Sharpe ratio on equity returns E([R.sup.e] - [R.sup.f])/[sigma]([R.sup.e] - [R.sup.f]); the average risk-free rate
E([R.sup.f]); and the standard deviation of the risk-free rate
To get the excess return of the portfolio, we deduct the five-year Philippine bond yield as 'risk-free rate
' of 5.5 percent from the expected return to derive 13 percent.
The Euribor rate for 1 year was used as the risk-free rate
of return proxy for the calculations (Euribor 2015).
By the way of example, we evaluate typical coupon bond with 30 years to maturity which is callable (case 1) and putable (case 2) and taking credit rating and risk-free rate
development into the consideration.
Statistics like Sharpe ratio, which measures returns above the risk-free rate
per unit of risk (volatility), and active share, which scores portfolios based on how much a manager's portfolio selection differs from the benchmark index, can be helpful differentiators and give investors insight into managers who are adding value rather than just mimicking or levering up the performance of an index.
The risk-free rate
Rf$ used in equation (1) is for an asset that is risk free rate in US dollars.
In theory, the baseline scenario assumes a risk-free rate
equal to the inverse of the expectation of the stochastic discount factor.
"Given investor caution after long periods of sustained price appreciation, we had expected to see more increases in cap rates; however, the decline in government bond yields has kept the spread of cap rates above the risk-free rate
favorable, which has helped to support current price levels," said CBRE Americas Head of Research Spencer Levy.
The difference between expected rate of return on equity and risk-free rate
is the (equity) risk premium.
Where [r.sub.f] is the risk-free rate
, ([r.sub.m] - [r.sub.f]) is the market risk premium and [beta] is the beta coefficient.
Al Maha report also noted that the Muscat Securities Market continues to be among the top bourses in the Gulf region with an average yield of 4.3 per cent over the last five years, which is also above risk-free rate
of return in Oman.