nvestment A has a beta of 1.3 and an expected rate of return of 17.2%. Investment...
nvestment A has a beta of 1.3 and an expected rate of return of 17.2%. Investment B has a beta of 0.8 and an expected rate of return of 11.9%. What is the equity premium (market risk premium)?
Homework Answers
CAPM
r = Rf + Beta * Market Risk Premium
Investment A
0.172 = Rf + 1.3 * Market Risk Premium (Eq 1)
Investment B
0.119 = Rf + 0.8 * Market Risk Premium (Eq 2)
Subtract Eq 2 from Eq 1
0.172 - 0.119 = Rf + 1.3 * Market Risk Premium - Rf - 0.8 * Market Risk Premium
0.053 = 0.5 * Market Risk Premium
Market Risk Premium = 0.053/0.5
Market Risk Premium = 0.106
Market Risk Premium = 10.6%
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