A stock has a beta of 0.75 and an expected return of 13%. The risk-free rate is 4%. Calculate the market
risk premium and the expected return on the market portfolio.
Answer:
According to CAPM: 0.13 = 0.04 + 0.75[E(RM) − RF].
Therefore, the market risk premium is equal to: [E(RM) − RF] = 0.12 = 12%.
The expected return on the market is calculated as: [E(RM) − 0.04] = 0.12, or E(RM) = 0.16 = 16%.
If anyone could help me with the algebra I would appreciate it. not urgent for David or Nicole to answer
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