suppose the risk free rate is 5%.

In one year the economy could be in one of three possible states: bust, normal, or boom with corresponding probabilities of 0.25, 0.5 and 0.25. The returns on a common stock A and the market portfolio M conditional on the state of the economy are presented in the table below. Assuming CAPM holds in the economy, calculate the market risk premium over the period Probability Stock A Market Portfolio Bust 0.25 -5% 3% Normal 0.50 10% 8% Boom 0.25 25% 13%