The markets in general are paying a 2% real rate of return.Inflation is expected to be 3%.ABC stock commands a 6% risk premium.What is the expected rate of return on ABC stock?
A)2%
B)5%
C)8%
D)11%

Question

Quizplus · Accepted Answer

The formula for expected rate of return is:
Expected rate of return = Real rate of return + Inflation + Risk premium

Given:
Real rate of return = 2%
Inflation = 3%
Risk premium = 6%

Expected rate of return = 2% + 3% + 6% = 11%

Therefore, the expected rate of return on ABC stock is 11%. The correct choice is D.

The Markets in General Are Paying a 2% Real Rate