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27 December, 03:54

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?

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Answers (1)
  1. 27 December, 03:57
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    7.90%

    Explanation:

    For this question, we use the Capital Asset Pricing Model formula that is presented below:

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    where,

    The Market rate of return - Risk-free rate of return) is also known as the market risk premium

    So, the expected market risk premium is

    14.29% = 3.7% + 1.34 * expected market risk premium

    10.59% = 1.34 * expected market risk premium

    So, the expected market risk premium is 7.90%
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