Question

**1. Assume the expected return on the market is 5 percent
and the risk-free rate is 4 percent.**

- What is the expected return for a stock with a beta equal to
1.00? *(Round answers to 2 decimal places, e.g.
15.25.)*

Expected return |

**2. Assume the expected return on the market is 8 percent
and the risk-free rate is 4 percent.**

- What is the expected return for a stock with a beta equal to
1.50? *(Round answers to 2 decimal places, e.g.
15.25.)*

Expected return |

- What is the market risk premium?

Market risk premium

Answer #1

Q 1). Solution :-

**Expected return for stock = Risk free return + Beta of
stock * (Expected Return on market - Risk free return)**

= 4 % + 1.00 * (5 % - 4 %)

= 4 % + 1.00 * 1 %

= 4 % + 1.00 %

= **5.00 %**

**Conclusion :- Expected return for stock = 5.00
%.**

Q. 2) Solution :-

**Expected return for stock = Risk free return + Beta of
stock * (Expected Return on market - Risk free return)**

= 4 % + 1.50 * (8 % - 4 %)

= 4 % + 1.50 * 4 %

= 4 % + 6.00 %

= **10.00 %**

**Market risk premium = Expected Return on market - Risk
free return.**

= 8 % - 4 %

= **4 %**

**Conclsuion :-**

Q. 2). a). Expected return for stock |
10.00 % |

Q. 2). b). Market risk premium |
4.00 % |

(The difference between expected return on market and risk free return is generally referred to as Market risk premium).

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rate is 5 percent, and the market risk premium is 9 percent. What
must the beta of this stock be? (Do not round intermediate
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