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11 July, 17:08

2. What is the risk premium for a stock where the risk free rate is 5.1%; the equity market risk premium is 5.0%; and the beta of the stock is 1.2.?

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  1. 11 July, 17:27
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    6%

    Explanation:

    First we have to the calculate the expected return on the stock using capital asset pricing model which is as follow:

    Expected return=Risk free return+Beta*Market risk premium

    Expected return=5.1%+1.2*5%=11.1%

    Now we have to calculate the risk premium by taking difference between the expected return and the risk free return.

    Risk premium=Expected return-Risk free return

    =11.1%-5.1%=6%
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