The equity risk premium for the market is 8 per cent. Wilson Products has a beta of 0.4. The real risk-free rate is 2 per cent and the expected inflation premium is 5 per cent. What is the required rate of return from Wilson?

Question

Quizplus · Accepted Answer

The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM): Required return = Risk-free rate + Beta * Equity risk premium. The nominal risk-free rate is the sum of the real risk-free rate and the expected inflation premium, which is 2% + 5% = 7%. Therefore, Required return = 7% + 0.4 * 8% = 10.2%.

The Equity Risk Premium for the Market Is 8 Per