If the market risk premium is (rm - rf) is 8%, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be:
A) less than 12%
B) 12%
C) greater than 12%
D) cannot be determined

Question

Quizplus · Accepted Answer

According to the CAPM, the expected return of a stock equals the risk-free rate plus the product of the market risk premium and the stock's beta. 
Expected Return = Risk-Free Rate + (Market Risk Premium * Beta)
Using the given values, we can calculate the expected return as:
Expected Return = 2% + (8% * 1.7)
Expected Return = 14.6%
Therefore, the risk premium of the stock with beta value of 1.7 is 14.6% - 2% = 12.6%, which is greater than 12%. Therefore, the correct answer is C.

If the Market Risk Premium Is (Rm - Rf) Is