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One must deduct the risk-free rate from the anticipated return on a stock in order to determine the projected risk premium.
What does risk-free rate serve as a means for?
The risk-free rate is the potential rate of return on an investment with no risk. As a result, it acts as the benchmark for other investments having a risk component. The yields on government bonds are among the most widely used risk-free rates for assets.
How is the risk premium determined using the risk-free rate?
The formula for calculating the risk premium is simple: By subtracting the anticipated return on a particular asset from the risk-free rate, the risk-free rate—which is simply the current interest rate paid on risk-free investments like government bonds and Treasuries—can be determined.
By dividing the predicted real interest rate by the anticipated rate of currency inflation, one can get the risk-free rate. Example: The risk-free rate is 6% since the expected inflation rate is 5% and the yield on TIPs is 1%.
Learn more about risk-free rate: https://brainly.com/question/28168891
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