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Risk Free Rate and Market Risk Premium

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1. Risk- Free Rate
A stock has an expected return of 14 percent, a beta of 1.70, and the expected return on the market is 10 percent. What must the risk-free rate be?
Risk-Free Rate = ?

2. Market Risk Premium
A stock has a beta of .8 and an expected return of 13 percent. If the risk-free rate is 4.5 percent, what is the market risk premium?
Market risk premium = ?

Please show the calculation along with the answer.

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Solution Preview

CAPM Formula: Required Return = risk free rate + beta * (expected return on market - risk free rate)

1. Given,

Required return = 14% ; beta = 1.70 ; expected return on market = 10%. In put these ...

Solution Summary

The solution calculates the Risk Free Rate and Market Risk Premium, using CAPM.