The two factor model on a stock provides a risk premium for exposure to market risk of 9%,a risk premium for exposure to interest rate of (-1.3%),and a risk free rate of 3.5%.What is the expected return on the stock?
A) 8.7%
B) 11.2%
C) 13.8%
D) 15.2%

Question

Quizplus · Accepted Answer

The expected return on the stock is the sum of the risk-free rate and the risk premium for exposure to market risk and interest rate risk. Therefore, the expected return on the stock is 3.5% + 9% - 1.3% = 11.2%.

The Two Factor Model on a Stock Provides a Risk