Zelo NV share has a beta of 1.23.The risk-free rate of return is 4.5% and the market rate of return is 10%.What is the amount of the risk premium on Zelo shares?
A)4.47%
B)5.50%
C)5.54%
D)6.77%
E)12.30%

Question

Quizplus · Accepted Answer

The formula for calculating the required rate of return (or the amount of the risk premium) is:
required rate of return = risk-free rate + beta*(market rate of return - risk-free rate)
Substituting the given values:
required rate of return = 0.045 + 1.23*(0.1 - 0.045) = 0.0677 or 6.77%
Therefore, the amount of the risk premium on Zelo shares is 6.77%. The correct answer is D.

Zelo NV Share Has a Beta of 1