Zelo stock has a beta of 1.23.The risk-free rate of return is 2.86 percent and the market rate of return is 11.47 percent.What is the amount of the risk premium on Zelo stock?
A)9.47 percent
B)12.60 percent
C)11.54 percent
D)10.59 percent
E)12.30 percent

Question

Quizplus · Accepted Answer

The formula to calculate the required rate of return or cost of equity using CAPM is:
Required Rate of Return = Risk-Free Rate + Beta*(Market Rate of Return - Risk-Free Rate)
Here, Risk-Free Rate = 2.86%
Market Rate of Return = 11.47%
Beta = 1.23
Therefore, the required rate of return or cost of equity for Zelo stock can be calculated as:
Required Rate of Return = 2.86% + 1.23*(11.47% - 2.86%) = 11.14%
The risk premium on Zelo stock is the difference between the required rate of return and risk-free rate:
Risk Premium = 11.14% - 2.86% = 8.28%
Therefore, the amount of the risk premium on Zelo stock is 8.28%, which is closest to option D, 10.59 percent.

Zelo Stock Has a Beta of 1