Question

Porter Inc's stock has an expected return of 10.75%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5%, what is the expected market risk premium

Answer 1

the expected market risk premium is 4.6%

Step-by-step explanation:

The computation of the expected market risk premium is shown below:

As we know that

Expected rate of return = Risk free rate of return + beta × market risk premium

10.75% = 5% + 1.25 × market risk premium

5.75% = 1.25 × market risk premium

So, the market risk premium is

= 5.75% ÷ 1.25

= 4.6%

hence, the expected market risk premium is 4.6%

we simply applied the above formula