Suppose you observe the following situation: Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21.What is the expected market risk premium?
A)8.8 percent
B)9.5 percent
C)12.6 percent
D)17.9 percent
E)20.0 percent

Question

Suppose you observe the following situation:  Assume the capital asset pricing model holds and stock A's beta is greater than stock B's beta by 0.21.What is the expected market risk premium?
A)8.8 percent 
B)9.5 percent 
C)12.6 percent 
D)17.9 percent 
E)20.0 percent

Quizplus · Accepted Answer

E(R_A) = 0.22(-0.12) + 0.48(0.10) + 0.30(0.23) = .0906E(R_B) = 0.22(-0.27) + 0.48(0.05) + 0.30(0.28) = .0486Slope_SML = (.0906 - 0.0486)/0.21 = 20 percent

Suppose You Observe the Following Situation: Assume the Capital