The risk premium on a stock represents the additional return investors require for taking on the risk of investing in that particular stock. To calculate the risk premium, subtract the risk-free rate of return from the market rate of return and multiply it by the stock's beta. For Clarity Homes stock with a beta of 1.46, the risk premium is 8.74%.
The risk premium on a stock represents the additional return investors require for taking on the risk of investing in that particular stock. To calculate the risk premium, we subtract the risk-free rate of return from the market rate of return and multiply it by the stock's beta.
In this case, the risk-free rate of return is 3.07% and the market rate of return is 11.81%. The stock's beta is 1.46. To find the risk premium, we can use the following formula:
Risk Premium = (Market Rate of Return - Risk-Free Rate of Return) * Beta
Substituting the given values:
Risk Premium = (11.81% - 3.07%) * 1.46
Risk Premium = 8.74%
So, the amount of the risk premium on the Clarity Homes stock is 8.74%.