Question

The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?

Answer 1

Answer:

Expected rate of return will be 13.6 %

Explanation:

We have given risk free return = 4 %

Risk premium is 4% and $\beta$ relative to this risk premium is 0.6

And then risk premium is changes to 6 % and  $\beta$ relative to it is 1.2

We have to find the expected return on this stock '

So expected return = risk free rate + $+(\beta \times risk\ premium)+(\beta \times risk\ premium)$

So expected return = 4+(0.6×4) +( 1.2×6) = 4+2.4+7.2 = 13.6 %