The Capital Asset Price Modeling (CAPM) gives the formula
for calculating the expected return of an asset given the risk as:
Rs = Rf + β (Rm – Rf)
Where,
Rs = expected return of the financial asset
Rf = risk free rate of return
β = beta
value of the asset
Rm = average
return on the capital market
The factor
(Rm – Rf) is also called as the market risk premium while the factor (Rs – Rf)
is the stock risk premium.
Rs – Rf = β
(Rm – Rf)
Rs – Rf = 1.7 (0.08)
Rs – Rf = 0.136 = 13.6%
Answer:
greater than 12% (= 13.6%)
