Question

Paycheck, inc. has a beta of 1.16. If the market return is expected to be 13.90 percent and the risk-free rate is 6.50 percent, what is paycheck's risk premium?

Answer 1

To calculate Paycheck, Inc.'s risk premium, subtract the risk-free rate from the expected market return and multiply it by the stock's beta.

Step-by-step explanation:

To calculate the risk premium, we need to subtract the risk-free rate of return from the expected market return and then multiply it by the stock's beta.

First, subtract the risk-free rate from the expected market return: 13.9% - 6.5% = 7.4%.

Then, multiply the result by the stock's beta: 7.4% * 1.16 = 8.584%.

Therefore, Paycheck, Inc.'s risk premium is 8.584%.