You own a stock with an average historical risk premium of 6.8%. The risk-free rate next year is expected to be 4.6%. What rate of return should you expect on your stock for next year?
A) 4.60%
B) 11.38%
C) 11.87%
D) 11.40%
E) 2.20%

Question

Quizplus · Accepted Answer

The rate of return on the stock can be calculated using the Capital Asset Pricing Model (CAPM):
Required rate of return = Risk-free rate + Beta x (Market risk premium)
Since the beta of the stock is not given, we cannot calculate the exact required rate of return. However, we are given the average historical risk premium of the stock, which is 6.8%. We can assume that this is the expected market risk premium for the coming year. 
Hence, the required rate of return = 4.6% + 6.8% = 11.4%
Therefore, the answer is D.

You Own a Stock with an Average Historical Risk Premium