The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?

Question

Business

Kaydence Keith

11 December, 21:45

The common stock of United Industries has a beta of 1.34 and an expected return of 14.29 percent. The risk-free rate of return is 3.7 percent. What is the expected market risk premium?

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Answers (1)

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Xzavier · Answer 1

7.90%

Explanation:

For this question, we use the Capital Asset Pricing Model formula that is presented below:

Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

where,

The Market rate of return - Risk-free rate of return) is also known as the market risk premium

So, the expected market risk premium is

14.29% = 3.7% + 1.34 * expected market risk premium

10.59% = 1.34 * expected market risk premium

So, the expected market risk premium is 7.90%