The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6. The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4.0%, what is the expected return on this share?

Question

Quizplus · Accepted Answer

The expected return on the share can be calculated using the Capital Asset Pricing Model (CAPM) as follows:

Expected Return = Risk-Free Rate + BetaAluminum * Risk PremiumAluminum + BetaGDP * Risk PremiumGDP

Expected Return = 4.0% + 0.6 * 4.0% + 1.2 * 6.0% = 13.6%

Therefore, the expected return on this share is 13.6%, which is option C.

The Risk Premium for Exposure to Aluminum Commodity Prices Is