A stock has a beta of 1.58 and an expected return of 16.2%. The risk-free rate is 3.8%. What is the market risk premium?
A)7.85%
B)10.01%
C)11.72%
D)12.50%
E)13.40%

Question

Quizplus · Accepted Answer

The market risk premium can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * Market Risk Premium. Rearranging gives Market Risk Premium = (Expected Return - Risk-Free Rate) / Beta = (16.2% - 3.8%) / 1.58 = 7.85%.

A Stock Has a Beta of 1