Question

if the market risk premium is 7%, the risk-free rate is 2% and the beta of a stock is 2.0, what is the expected return of the stock?

Answer 1

Expected return of the stock is greater than 12%.

Using formula, Risk free rate + beta (market risk rate - risk free rate)\

= 2% + 2.0 (7%-2%)

= 13.6 - 0.4* risk premium

Risk premium of a stock is greater than 12%.

A stock's total return takes into account both capital gains and losses as well as dividend income, as opposed to a stock's nominal return, which only displays its price movement. In addition to considering the actual rate of return, investors should consider their ability to withstand the risk involved with a given investment. An investment's return on investment (ROI) provides a general indication of its profitability. The return on investment (ROI) is calculated by subtracting the investment's initial cost from its final value, dividing the result by the cost of the investment, and finally multiplying the result by 100.

Note that the full question is:

If the market risk premium is 7%, the risk-free rate is 2% and the beta of a stock is 2.0, what is the expected return of the stock?

A. less than 12%.

B. 12%.

C. greater than 12%.

D. cannot be determined.

To learn more about returns: brainly.com/question/24301559

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