How can one estimate the opportunity cost of capital for an "average risk" project?

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How can one estimate the opportunity cost of capital for an "average risk" project?




Answer: Over the past 85 years the calculated return on a large portfolio of Canadian common stocks has averaged about 7 percentage points a year higher than the return on safe Treasury bills. This is the risk premium that investors have received for taking on the risk of investing in stocks. Long-term bonds have offered a higher return that Treasury bills but less than stocks. If the risk premium in the past is a guide to the future, we can estimate the expected return on the market today by adding that 7 percentage point expected risk premium to today's interest rate on Treasury bills. This would be the opportunity cost of capital for an average-risk project, that is, one with the same risk as a typical share of common stock.

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