A stock has a beta of 1.2 and an expected return of 13.0 percent. If the risk-fr

Question

A stock has a beta of 1.2 and an expected return of 13.0 percent. If the risk-free rate is 5.0 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

A stock has a beta of 1.2 and an expected return of 13.0 percent. If the risk-free rate is 5.0 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

As per Capital Asset Pricing Model, Re = Rf + (Rm - Rf) x Beta

Where,

Re = Expected Return = 13%

Rf = Risk free rate = 5%

(Rm - Rf) = Market risk premium

Beta = Beta of the stock = 1.2

So, putting these in above equation,

13 = 5 + (Rm - Rf) x 1.2

So, Rm - Rf = 8 / 1.20 = 6.67%

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