If the expected return on the market is 16%,then using the historical risk premium on large stocks of 8.6%,the current risk-free rate is:
A) 4.6%
B) 7.4%
C) 8.4%
D) 10.6%
E) 12.6%

Question

Quizplus · Accepted Answer

The formula for calculating the expected return on an asset is:

Expected Return = Risk-Free Rate + Risk Premium

Using the information given:

Expected return on the market = 16%
Historical risk premium on large stocks = 8.6%

So, we can solve for the risk-free rate as follows:

16% = Risk-Free Rate + 8.6%
Risk-Free Rate = 16% - 8.6%
Risk-Free Rate = 7.4%

Therefore, the current risk-free rate is 7.4%. The best choice is B.

If the Expected Return on the Market Is 16%,then Using