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

Question

Quizplus · Accepted Answer

According to the CAPM formula, the expected return on a stock is equal to the risk-free rate plus the product of the market risk premium and the stock's beta value. Using this formula, we can calculate the expected return of the stock as follows:

Expected Return = Risk-Free Rate + (Market Risk Premium x Beta)
Expected Return = Risk-Free Rate + (8% x 1.7)
Expected Return = Risk-Free Rate + 13.6%

Since the risk premium of the stock with a beta value of 1.7 is 13.6%, which is greater than 12%, the correct answer is (C) greater than 12 percent.

If the Market Risk Premium Is 8 Percent, Then According