Question

Compute the market risk premium for the stock of Omega Tools if the risk-free rate is 6%, the expected return is 12%, and Omega's stock has a beta of .8.

Answer 1

Rm = 13.5% = Market Risk Premium

Step-by-step explanation:

Using the capital asset pricing model we have,

Expected return = Rf + Beta
`*` (Rm - Rf)

Here Expected return = 12% as provided in question

Rf = Risk free rate of return = 6%

Rm = Market risk premium = ?

Beta = 0.8

Putting values in the formula, we have

12% = 6% + 0.8(Rm - 6%)

6% = 0.8Rm - 0.048

0.048 + 0.06 = 0.8Rm

0.108 = 0.8Rm

0.135 = Rm

Rm = 13.5% = Market Risk Premium