Two stocks, A and B, have beta coefficients of 0.8 and 1.4, respectively. If the expected...
Two stocks, A and B, have beta coefficients of 0.8 and 1.4, respectively. If the expected return on the market is 10 percent and the risk-free rate is 5 percent, what is the risk premium associated with each stock?
Homework Answers
Risk premium of stock A = Beta ( market return - risk free rate)
Risk premium of stock A = 0.8 ( 0.1 - 0.05)
Risk premium of stock A = 0.04 or 4%
Risk premium of stock B = Beta ( market return - risk free rate)
Risk premium of stock B = 1.4 ( 0.1 - 0.05)
Risk premium of stock B = 0.07 or 7%
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