Question

Consider a stock that has an expected return of 12.25%, a beta of 1.25, and is...

Consider a stock that has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, the market risk premium is closest to:

a.

5.80%
b.

6.09%
c.

6.25%
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Answer #1

The market risk premium is closest to:

Answer: 5.80%

Working

Formula for calculating market risk premium is as follows;

Market risk premium = (Expected return – Risk Free rate) ÷ Beta

                                    = (12.25% - 5.00%) ÷ 1.25

                                    = 5.80%

Data provided in the question

Expected return = 12.25%

Risk Free rate = 5.00%

Beta = 1.25

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