Answer:
C) If Stock B's required return is 11%, then the market risk premium is 6%.
Explanation:
In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below
Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)
The (Market rate of return - Risk-free rate of return) is also known as the market risk premium
If we take the required return is 11%, so the market risk premium would be for stock B
11% = 5% + 1 × Market risk premium
11% - 5% = Market risk premium
So, the market risk premium would be 6%
If we take the required return is 11%, so the market risk premium would be for stock A
11% = 5% + 2 × Market risk premium
11% - 5% = Market risk premium
So, the market risk premium would be 3%
Hence, the correct option is C
