# Calculating the risk premium and expected return

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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