Answer: 6.6%
Explanation:
The expected rate of return is simply the risk free rate + the risk premium. So, 3.8% + 2.8% = 6.6%.
- The risk free rate is the return an investor would receive without any risk.
- The risk premium is the return an investor would receive over and above the risk free rate.
- Conceptually, if we rearrange this formula, if an investor require a rate of return of 6.6%, then the risk premium is simply the excess rate over the risk free rate. So, 6.6% - 3.8% = 2.8%. Here we can check that our work is correct.