Question

What is the risk premium for a stock where the risk free rate is 5.1%; the equity market risk premium is 5.0%; and the beta of the stock is 1.2.

Answer 1

Answer:

6%

Explanation:

First we have to the calculate the expected return on the stock using capital asset pricing model which is as follow:

Expected return=Risk free return+Beta*Market risk premium

Expected return=5.1%+1.2*5%=11.1%

Now we have to calculate the risk premium by taking difference between the expected return and the risk free return.

Risk premium=Expected return-Risk free return

                       =11.1%-5.1%=6%

Hope it helps u !