Mary is considering investing in Lensgate Industries Ltd., a Canadian common stock with a historic annual rate of return of 9%. The stock is as risky as the portfolio of Canadian common stocks. If Government of Canada t-bills currently yield 4% and a portfolio of Canadian common stocks has a risk premium of 6%, what should be Mary's minimum acceptable rate of return if she invests in this stock?
A) 14%
B) 10%
C) 9%
D) 6%

Question

Quizplus · Accepted Answer

Mary's minimum acceptable rate of return should be equal to the risk-free rate plus the stock's risk premium because the stock is as risky as the portfolio of Canadian common stocks. Therefore, her minimum acceptable rate of return is:

4% + 6% = 10%

The historic annual rate of return of 9% is not relevant in this calculation as it only represents the stock's past performance and does not take into account future market conditions or risks.

Mary Is Considering Investing in Lensgate Industries Ltd