Question

2. What is the risk premium for a stock where the risk free rate is 5.1%; the equity market risk premium is 5.0%; and the beta of the stock is 1.2.?

Answer 1

6%

Step-by-step explanation:

First we have to the calculate the expected return on the stock using capital asset pricing model which is as follow:

Expected return=Risk free return+Beta*Market risk premium

Expected return=5.1%+1.2*5%=11.1%

Now we have to calculate the risk premium by taking difference between the expected return and the risk free return.

Risk premium=Expected return-Risk free return

=11.1%-5.1%=6%