Question

asset w has an expected return of 17.2 percent and a beta of 1.80. if the risk-free rate is 2.4 percent, what is the market risk premium?Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.

Answer 1

We can use the Capital Asset Pricing Model (CAPM) to calculate the market risk premium (MRP). The formula for CAPM is:

r_a = r_f + β_a (r_m - r_f)

Where:

r_a = expected return on asset a

r_f = risk-free rate

β_a = beta of asset a

r_m = expected return on the market

Rearranging this formula, we can solve for the market risk premium:

r_m - r_f = (r_a - r_f) / β_a

Plugging in the values given in the problem, we get:

r_a = 17.2%

β_a = 1.80

r_f = 2.4%

r_m - r_f = (r_a - r_f) / β_a

r_m - 2.4% = (17.2% - 2.4%) / 1.80

r_m - 2.4% = 8.44%

Adding 2.4% to both sides, we get:

r_m = 10.84%

Therefore, the market risk premium is 8.44%, rounded to 2 decimal places.