Zelo,Inc. stock has a beta of 1.23. The risk-free rate of return is 4.5% and the market rate of return is 10%. What is the amount of the risk premium on Zelo stock?
A) 4.47%
B) 5.50%
C) 5.54%
D) 6.77%
E) 12.30%

Question

Quizplus · Accepted Answer

The formula to calculate the expected return on a stock is:
Expected Return = Risk-free rate + Beta x (Market rate of return - Risk-free rate)
Using the given values:
Expected Return = 4.5% + 1.23 x (10% - 4.5%) = 10.02%
Therefore, the risk premium on Zelo stock is the difference between the expected return and the risk-free rate:
Risk premium = 10.02% - 4.5% = 5.52%
The closest answer choice is D (6.77%), which is slightly higher than the calculated risk premium. Therefore, the correct answer is D.

Zelo,Inc Stock Has a Beta of 1