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    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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    Solution Preview

    (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 ...

    Solution Summary

    The solution describes the steps to calculate risk premium and expected return in the given case.

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