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Suppose the common stock of ACME has a beta of 1.28 and a required return of...

Suppose the common stock of ACME has a beta of 1.28 and a required return of 15.47%. The rate of return on T-Bills 3.7% while the inflation rate is 4.2%. What is the expected market risk premium?

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Answer #1

beta = 1.28

required return = 15.47%

rate of return on T-Bills or risk free rate = 3.7%

rate of return as per CAPM = Risk free rate + (Beta * Market risk premium)

15.47% = 3.7% + (1.28 * market risk premium)

11.77% = 1.28*Market risk premium

Market risk premium= 11.77%/1.28

=9.195 or 9.20%

So, market risk premium is 9.20%

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