The two factor model on a share provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate of (-1.3%), and a risk-free rate of 3.5%. What is the expected return on the share?
A)8.7%
B)11.2%
C)13.8%
D)15.2%

Question

Quizplus · Accepted Answer

The expected return on the share is the sum of the risk-free rate and the risk premium for exposure to market risk and interest rate risk. Therefore, the expected return on the share is 3.5% + 9% + (-1.3%) = 11.2%.

The Two Factor Model on a Share Provides a Risk