Question

According to the CAPM, what is the market risk premium given an expected return on security of ( 20.0%), a stock beta of 1.8, and a risk-free interest rate of ( 11% )?

Answer 1

The market risk premium is 9.0%.

Step-by-step explanation:

The market risk premium according to the Capital Asset Pricing Model (CAPM) can be calculated by subtracting the risk-free interest rate from the expected return on the security (also known as the asset). In this case, the expected return on the security is 20.0% and the risk-free interest rate is 11%. Therefore, the market risk premium can be calculated as:

Market Risk Premium = Expected Return on Security - Risk-Free Interest Rate

= 20.0% - 11% = 9.0%

Market Risk Premium = (Expected Return - Risk-Free Rate) / Beta

Plugging in the values given, we get:

Market Risk Premium = (20.0% - 11%) / 1.8

Market Risk Premium = 9% / 1.8

Market Risk Premium =~ 5%

Hence, the market risk premium is approximately 5%.