Question

Compute the risk premium (this is part of the required rate of return – I am not looking for the full RRR here) for the stock of Omega Tools if the risk free rate is 6%, the expected market return is 12%, and Omega's stock has a beta of .8.

Answer 1

Under the Capital Asset pricing model
Rs = Rf + Beta*(Rm-Rf)
where Rs is the expected return on the stock, Rf is the risk free rate, Rm - Rf = difference between the expected return on the market
portfolio and the riskless rate.
riskfree rate = .06
Expected market return = .12
Beta = .8
Expected return on stock = .06 +.8*(.12-.06)
Expected return on stock = .108
Expected return on stock is 10.8%
The risk premium is (expected market return - risk free rate)
The risk premium is (.12 - .06)
The risk premium is 6%