Problem 6.12 If the expected return on the market is 7 percent and the risk-free rate...

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Answer 1

Answer #1

HI

We will use Capital Asset Pricing model to solve the problem here.

market return rm = 7%

risk free rate rf= 4%

beta = 1.10

as per CAPM

Expected return of stock = rf + beta*(rm-rf)

= 4 + 1.1*(7-4)

=4 + 1.1*3

= 4+3.3

= 7.3%

market risk premium = market return - risk free rate

= 7-4 = 3%

Thanks

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Answer 2

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