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MA_775_DIABLO [31]
3 years ago
5

According to the CAPM, what is the market risk premium given an expected return on a security of 15.8%, a stock beta of 1.1, and

a risk-free interest rate of 7%? Multiple Choice 7.70% 6.05% 7.00% 8.00%
Business
1 answer:
Anna35 [415]3 years ago
3 0

Answer:

The risk premium on market is 8%

Explanation:

The CAPM or Capital Asset Pricing Model is used to calculate the required rate of return on a stock which is the minimum return that is expected or required by the investors to invest in a stock based on its systematic risk as measured by the beta of the stock.

The formula to calculate r under the CAPM is,

r = rRF + Beta * rpM

Where,

  • rRF is the risk free rate
  • rpM is the risk premium on market

To calculate the risk premium on market, we will input the available values for r, rRF and beta in the equation above.

0.158 = 0.07 + 1.1 * rpM

0.158 - 0.07 = 1.1 * rpM

0.088 / 1.1 = rpM

rpM = 0.08 or 8%

So, the risk premium on market is 8%

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