If the market risk premium is 8%,then according to the CAPM,the risk premium of a stock with beta value of 1.7 must be:
A)less than 12%.
B)12%.
C)greater than 12%.
D)cannot be determined.

Question

Quizplus · Accepted Answer

According to the CAPM, the expected return of a stock is equal to the risk-free rate plus the product of the market risk premium and the stock's beta. Therefore, the risk premium of the stock with beta 1.7 would be:

Risk premium = (market risk premium) x (beta) = 8% x 1.7 = 13.6%

This is greater than 12%, so the correct choice is (C) greater than 12%.

If the Market Risk Premium Is 8%,then According to the CAPM,the