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RC Inc. has a market beta of 1.25 and a T-bond beta of .65.
Calculate the total risk premium for this stock.
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Answer #1
  1. Total risk premium for this stock = Market beta * Market risk premium + T-bond beta * Risk premium of T-Bond portfolio

Where,

RC Inc. has a market beta =1.25

T-bond beta = 0.65

Risk premium of market index = 7%

Risk premium of T-Bond portfolio = 2.5%

Therefore the total risk premium for this stock = 1.25 * 7% + 0.65 * 2.5%

= 10.375%

  1. Expected return of RC stock = Risk free rate + the total risk premium for this stock

Where,

Risk free rate = 3%

Therefore

Expected return of RC stock = = 3% + 10.375% = 13.375%

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