If the market risk premium is currently 6 percent and the risk-free rate of return is 4 percent, then what is the expected return on a common share with a beta equal to 2?

Question

Quizplus · Accepted Answer

The expected return on a common share (r) can be calculated using the Capital Asset Pricing Model (CAPM) formula: r = Rf + β*(Rm - Rf), where Rf is the risk-free rate of return, β is the beta coefficient of the stock, and Rm is the market rate of return. Plugging in the given values, we get:
r = 4% + 2*(6%) = 16%
Therefore, the expected return on the common share is 16%, which corresponds to choice D.

If the Market Risk Premium Is Currently 6 Percent and the Risk-Free