Question

Stock A has a beta of 0.889. The expected return on the stock is 15.53% and Treasury bills yield 6.85%. What is your estimate of the market risk premium?

Answer 1

Given that,

Beta of stock A = 0.889

Expected return on stock A E(A) = 15.53%

risk free rate Rf = 6.85%

So using CAPM model, expected return of stock A is

E(A) = Rf + beta*(Rm - Rf)

=> 15.53 = 6.85 + 0.889*(Rm - 6.85)

=> Rm = 16.61%

estimate of the market risk premium = 16.61%