You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?

Question

Quizplus · Accepted Answer

Your risk premium is the difference between the return you earn and the return on a safe asset. To find your return, use the present value equation: PV (current stock price)= FV (the future value)/ (1 + i). Here, $61.06 = ($65 + $4)/ (1 + i), so 1 + i = 1.13, and i = 0.13, or 13 percent. Your risk premium is 13 percent − 5 percent = 8 percent.

You Expect a Share of EconNews