Question

The stock of Cachapa International has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Cachapa's stock?

Answer 1

The risk premium = 6.765%

Step-by-step explanation:

Required rate of return (r) on Cachapa International's stock = 0.045 + 1.23 * (0.1 - 0.045) = 0.11265 or 11.265%

The risk premium on a stock is the additional return that is expected from the stock based on the risks it carry.

It is simply calculated by deducting the risk free rate from the required rate of return (r) of the stock

Thus, the risk premium on Cachapa's stock is = 11.265 - 4.5 = 6.765%