Question

A stock has an average expected return of 10.1 percent for the next year. The beta of the stock is 1.45. The T-Bill rate is 5.5% and the T-Bond rate is 3.5 %. What is the market risk premium?
a. 3.17%.
b. 4.60%.
c. 14.60%.
d. 2.48%.
e. 4.93%.

Answer 1

Answer:

The right solution is "4.55%".

Explanation:

Given that,

Expected return,

= 10.1%

Risk-free rate,

= 3.5%

Beta,

= 1.45

Now,

The market risk premium will be:

⇒ $Expected \ return=Risk-free \ rate+Beta\times (Market \ risk \ premium)$

⇒ $Market \ risk \ premium=\frac{Expected \ return-Risk -free \ rate}{Beta}$

By putting the values, we get

⇒                                      $=\frac{10.1-3.5}{1.45}$

⇒                                      $=\frac{6.6}{1.45}$

⇒                                      $=4.55$ (%)