Question

Suppose the common stock of mclaughlin corporation has a beta of 1.35 and an expected return of 11.05 percent. the risk-free rate of return is 3.25 percent. what is the expected market risk premium?

a. 2.98%
b. 3.36%
c. 4.55%
d. 5.78%
e. 6.83%
f. 7.94%
g. 8.52%
h. 9.03%

Answer 1

The expected market risk premium can be calculated using the CAPM formula. For McLaughlin Corporation with an expected return of 11.05%, beta of 1.35, and a risk-free rate of 3.25%, the market risk premium is 5.78%. option d.

Step-by-step explanation:

To find the expected market risk premium, we can use the Capital Asset Pricing Model (CAPM), which states that the expected return on a security is equal to the risk-free rate plus the product of the security's beta and the market risk premium. The formula for CAPM is:

Expected return = Risk-free rate + Beta * (Market risk premium)

We can rearrange the formula to solve for the market risk premium:

Market risk premium = (Expected return - Risk-free rate) / Beta

Using the values provided:

Expected return on McLaughlin Corporation stock = 11.05%

Risk-free rate = 3.25%

Beta of McLaughlin Corporation stock = 1.35

Market risk premium = (11.05% - 3.25%) / 1.35

Market risk premium = 5.78%

Therefore, the correct answer is d. 5.78% percent.