Question

Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock?

Answer 1

Calculate the risk premium as follows:

$$ \begin{aligned} \text { Risk premium } &=\operatorname{Beta} \times\left(\begin{array}{c} \text { Market rate of return }- \\ \text { Risk free return } \end{array}\right) \\ &=1.09 \times(9.80 \%-2.75 \%) \\ &=1.09 \times 0.0705 \\ &=0.0768 \text { or } 7.68 \% \end{aligned} $$

Therefore, the risk premium is \(7.68 \%\)