Use the following information to answer the question(s)below.
-If the market risk premium is 6% and the risk-free rate is 4%,then the expected return of investing in Merck is closest to:
A)5.4%.
B)9.4%.
C)10.0%.
D)10.4%.

Question

Use the following information to answer the question(s)below. 
-If the market risk premium is 6% and the risk-free rate is 4%,then the expected return of investing in Merck is closest to:
A)5.4%. 
B)9.4%. 
C)10.0%. 
D)10.4%.

Quizplus · Accepted Answer

The expected return of investing in Merck is closest to 9.4%. This is because the expected return is equal to the risk-free rate plus the market risk premium times the beta of the stock. In this case, the risk-free rate is 4%, the market risk premium is 6%, and the beta of Merck is 1.5. Therefore, the expected return is 4% + 6% * 1.5 = 9.4%.

Use the Following Information to Answer the Question(s)below