In addition to calculating the required rate of return on a stock by the CAPM, analysts can use the risk premium approach where a risk premium is added onto the company's current bond yield. Typically this risk premium is equal to:
A) the current T-bill rate.
B) a range of values between 200-600 basis points.
C) equal to the market risk premium in the CAPM.
D) approximately 600 basis points.

Question

Quizplus · Accepted Answer

The risk premium approach involves adding a risk premium onto the company's current bond yield to calculate the required rate of return on a stock. This risk premium typically ranges between 200-600 basis points, reflecting the additional risk investors take on when investing in stocks over bonds.

In Addition to Calculating the Required Rate of Return on a Stock