Question

A stock has an average expected return of 9.7 percent for the next year. The beta of the stock is 1.34. The T-Bill rate is 5.2% and the T-Bond rate is 3%. What is the market risk premium

Answer 1

Answer:

3.4%

Explanation:

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

9.7 = 5.2 + 1.34(x - 5.2)

9.7 - 5.2 =  1.34(x - 5.2)

3.35 = x - 5.2