Potash Corp stock has a beta of 1.1,while Tim Horton's stock has a beta of 1.4.The risk-free rate is 1.9%,and the expected return on a portfolio with 30% weight in Potash and the remainder in Tim Horton's is 9.76%.What is the market risk premium?

Question

Quizplus · Accepted Answer

First, we need to calculate the expected return of each stock using the Capital Asset Pricing Model (CAPM):

Expected return of Potash Corp = 1.9% + 1.1*(Market Risk Premium)
Expected return of Tim Horton's = 1.9% + 1.4*(Market Risk Premium)

Next, we can use the expected returns and portfolio weight to calculate the overall expected return:

0.30*(Expected return of Potash Corp) + 0.70*(Expected return of Tim Horton's) = 9.76%

Substituting the CAPM equations, we get:

0.30*(1.9% + 1.1*(Market Risk Premium)) + 0.70*(1.9% + 1.4*(Market Risk Premium)) = 9.76%

Solving for Market Risk Premium, we get:

Market Risk Premium = 6%

Therefore, the answer is C) 6%.

Potash Corp Stock Has a Beta of 1