Calculating the risk premium and expected return
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Risk Free rate 4% and the expected return on the market portfolio is 12%. Using the capital asset model:
(a). What is the risk premium on the market?
(b). What is the required return on an investment with a beta of 1.5?
(c). If an investment with a beta of .8 offers an expected return of 9.8%, does it have a positive NPV? and
(d). If the market expects a return of 11.2% from stock X, what is its beta? Please explain.
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The solution describes the steps to calculate risk premium and expected return in the given case.
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(a). What is the risk premium on the market?
Risk free rate=rf=4%
Expected return on market portfolio=rm=12%
Risk premium on market=rp=rm-rf=12%-4%=8%
(b). What is the required return on an ...
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- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
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