Calculate the risk premium on Stock C given the following information: risk-free rate = 5%, market return = 13%, Stock C = 1.3 Beta.
A)8.0%
B)10.4%
C)15.4%
D)16.9%

Question

Quizplus · Accepted Answer

The formula for calculating the required rate of return for Stock C is:
Required rate of return = Risk-free rate + Beta*(Market return - Risk-free rate)

Substituting the given values in the formula, we get:
Required rate of return for Stock C = 5% + 1.3*(13% - 5%) = 5% + 10.4% = 15.4%

The risk premium on Stock C is the excess return that it provides over the risk-free rate. Therefore, the risk premium on Stock C is:
Risk premium = Required rate of return - Risk-free rate = 15.4% - 5% = 10.4%

Therefore, the correct answer is B) 10.4%.

Calculate the Risk Premium on Stock C Given the Following