Asset A’s expected rate of return is 17%. If risk free rate is 2% and beta...

Question

Question

Asset A’s expected rate of return is 17%. If risk free rate is 2% and beta is 3, what is the market risk premium?

Answer 1

Answer #1

Solution :

As per the CAPM the Expected rate of return is calculated using the formula :

Expected rate of return = Risk free rate + ( Beta * Market Risk premium )

As per the information given in the question we have

Expected rate of return = 17 % ; Risk free rate = 2 % ; Beta = 3 ; Market Risk premium = To find ;

Applying the above information in the formula we have

17 % = 2 % + ( 3 * Market Risk premium )

17 % - 2 % = ( 3 * Market Risk premium )

15 % = ( 3 * Market Risk premium )

( 3 * Market Risk premium ) = 15 %

Market Risk premium = 15 % / 3 = 5 %

Thus the Market Risk premium of Asset A is = 5 %

Answer 2

Similar Homework Help Questions

Asset A has a CAPM beta of 1.5. The covariance between asset A and asset B is 0.13. If the risk-free rate is 0.05, the expected market risk premium is 0.07, and the market risk premium has a standard...

Asset A has a CAPM beta of 1.5. The covariance between asset A and asset B is 0.13. If the risk-free rate is 0.05, the expected market risk premium is 0.07, and the market risk premium has a standard deviation of 25%, then what is asset B's expected return under the CAPM? Asset A has a CAPM beta of 1.5. The covariance between asset A and asset B is 0.13. If the risk-free rate is 0.05, the expected market risk...
TOISRULIUSS. Expected Return = Risk free Rate + beta (expected market return - risk free rate)...

TOISRULIUSS. Expected Return = Risk free Rate + beta (expected market return - risk free rate) .04 +0.80.09 - .04) = .08 = 8.0% 3. Suppose the MiniCD Corporation's common stock has a return of 12%. Assume the risk- free rate is 4%, the expected market return is 9%, and no unsystematic influence affected Mini's return. The beta for MiniCD is:
Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while...

Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's market risk premium is Asset Y has a beta of 1.2. The risk-free rate of return is 6 percent, while the return on the market portfolio of assets is 12 percent. The asset's market risk premium is

Mack Motors has a beta of 1.1. Real risk free return is 2 % , expected...

Mack Motors has a beta of 1.1. Real risk free return is 2 % , expected inflation is 3%, and market risk premium if 4.79%. What is Mack's required rate of return? 6. Brook industries' stock return is 11.75% and beta is 1.23. What is the market return if risk free 7. rate is 4.3 % ?
. The Treasury bill rate (i.e. risk-free rate) is 2.5%, and the expected return on the...

. The Treasury bill rate (i.e. risk-free rate) is 2.5%, and the expected return on the market portfolio is 12%. Using the capital asset pricing model: a. What is the risk premium on the market? b. What is the required rate of return on an investment with a beta of 1.15? c. If an investment with a beta of 0.80 offers an expected return of 10.5%, does it have a positive NPV?
Security X has a rate of return of 13% and a beta of 1.15. The risk-free...

Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 10%. According to the capital asset pricing model, security X is 1) fairly priced 2) underpriced 3) overpriced 4) None of the answers are correct Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is 10%....

What is the expected return of Seaside Corp if the risk free rate is 1.85%, the stock's beta is 1.41, and the market pre...

What is the expected return of Seaside Corp if the risk free rate is 1.85%, the stock's beta is 1.41, and the market premium is 6.4%? What is the expected market return if Seaside's expected return is instead 12.6%? How does Seaside's beta change if the expected return is 12.6%, but the market premium remains at 6.4%?
Beta and required rate of return A stock has a required return of 13%; the risk-free...

Beta and required rate of return A stock has a required return of 13%; the risk-free rate is 3%; and the market risk premium is 3%. What is the stock's beta? Round your answer to two decimal places. If the market risk premium increased to 10%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged. If the stock's beta is equal to 1.0, then the change in required rate...
Asset W has an expected return of 12.0 percent and a beta of 1.25. If the...

Asset W has an expected return of 12.0 percent and a beta of 1.25. If the risk-free rate is 4.6 percent, what is the market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Market risk premium %

a) If the CAPM is correct, what would be the expected return of a risky asset...

a) If the CAPM is correct, what would be the expected return of a risky asset with a beta of 1.2, given a risk free rate of 3% and an expected market risk premium of 4.5%? b) If the CAPM is correct, what would be the expected return of a risky asset with a beta of 0.8, given a risk free rate of 4% and an expected return of the market of 9%