Desreumaux Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium.If the risk-free rate is 5.00%, what is the market risk premium?
A)5.80%
B)5.95%
C)6.09%
D)6.25%
E)6.40%

Question

Quizplus · Accepted Answer

The market risk premium is the difference between the expected return on the market and the risk-free rate. In this case, the expected return on the market is not given, so we cannot calculate the market risk premium directly. However, we can use the Capital Asset Pricing Model (CAPM) to calculate the market risk premium. The CAPM states that the expected return on a stock is equal to the risk-free rate plus the market risk premium times the stock's beta. In this case, the expected return on the stock is 12.25%, the risk-free rate is 5.00%, and the beta is 1.25. Therefore, the market risk premium is (12.25% - 5.00%) / 1.25 = 5.80%.

Desreumaux Inc's Stock Has an Expected Return of 12