The risk-free rate of return is 5 percent and the market risk premium is 9 percent....

Question

Question

The risk-free rate of return is 5 percent and the market risk premium is 9 percent. What is the expected rate of return on a

Answer 1

Answer #1

Based on CAPM, Expected return on stock = Risk free rate + Beta * (Expected market return - Risk free rate)

Market risk premium = Expected market return - Risk free rate = 9%

Expected return on stock = 5% + 1.16 * 9%

Expected return on stock = 5% + 10.44%

Expected return on stock = 15.44%

Answer 2

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