Question

A stock has a beta of 0.7 and an expected return of 11.1 percent. If the risk-free rate is 4.7 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Market Risk Premium = 13.84%

Explanation;

As per information of the question, following information are given;

Expected return is given = 11.1%

Risk free rate is given = 4.7%

Beta is given = 0.7

Formula of required return for the overall stock market is as follow;

Expected return =

Risk free rate + (Market risk premium – Risk free rate) * Beta

Now, let’s put the values in above given formula;

Required return for the overall stock market =

11.1% = 4.7% + (Market risk premium – 4.7%) * 0.7

11.1% = 4.7% + (0.7 Market risk premium – 3.29%)

0.7 Market risk premium = 9.69%

Market risk premium = 9.69% / 0.7

Market risk premium = 13.84%