Answer:
The appropriate solution is "13.4%". A further explanation is described below.
Explanation:
The given values are:
Return rate,
Rf = 8%
Market return,
Rm = 14%
beta,
= 0.9
Now,
The assets required rate will be:
= [tex]Rf + (Rm-Rf)\times beta[/tex]
On putting the given values, we get
= [tex]8 + (14-8)\times 0.9[/tex]
= [tex]8+6\times 0.9[/tex]
= [tex]8+5.4[/tex]
= [tex]13.4[/tex] (%)
Based on the information given the stock's risk premium is 6%.
Using this formula
Stock's risk premium = Return on the market - Risk free rate
Where:
Return on the market=14%
Risk free rate=8%
Let plug in the formula
Stock's risk premium = 14% - 8%
Stock's risk premium = 6%
Inconclusion the stock's risk premium is 6%.
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