A stock provides an expected return of 12 The risk free rate

A stock provides an (expected) return of 12%. The risk free rate (e.g., T-Bill rate) is 3%. What is the risk premium for the stock?

a) 12%

b) 9%

c) 6%

d) 3%

Solution

As per CAPM , Ke= Rf + Beta (Rm-Rf) Beta (Rm-Rf) is Risk Premium component 12 % = 3% + Risk Premium Risk Premium = 12%-3% Risk Premium = 9% Option B) is answer