A stock's risk premium is equal to the: expected market risk premium times beta. expected market risk premium multiplied by beta plus the risk-free return. Risk-free return plus expected market return. expected market return times beta.

A stock's risk premium is equal to the: expected market risk premium times beta. expected market risk premium multiplied by beta plus the risk-free return. Risk-free return plus expected market return. expected market return times beta.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 9MC: What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write...

See similar textbooks

Related questions

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: As per the security market line following is the Rate of return for stock A and stock B…

Q: The covariance between stocks A and B is 0.0014, the standard deviation of stock A is 0.032, and the…

A: Answer: The most relevant figure is (a) that reflects the risk-return characteristics of stock A and…

Q: A stock has a required return of 11%, the risk-free rate is 6%, and the market risk premium is 3%.…

A: CAPM states:Re = Rf + B (MRP)Required return =11% Risk free rate= 6% Market risk premium =3%

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: Required rate of return on stock A is RARequired rate of return on stock B is RBRisk free rate is…

Q: a. Determine Stock X's beta coefficient. b. Determine the arithmetic average rates of return for…

A: Beta Coefficient of Stock X = Using excel SLOPE function SLOPE(Returns of Stock X, Returns of NYSE)…

Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…

A: Answer: Ratio of beta of A to beta of B is,

Q: The risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock's beta is 2.27. What is…

A: Following details are given in the question: Risk free rate = 5.6% Market Risk premium = 8.5%…

Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…

A: Given that;Return on market portfolio is denoted by RM.Required return on stock A is RA and the…

Q: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…

A: Capital Asset Pricing Model (CAPM): CAPM is the method of calculating the expected return on…

Q: A stock with a beta of zero would be expected to a. have a rate of return equal to one b. have a…

A: In the Given question we are given four options related to beta and rate of return of the stock and…

Q: A stock's returns have the following distribution: Demand for the Probability of This Rate of Return…

A: Stock’s expected return is the return which is expected to be generated from the project. This…

Q: What should be the risk premium and return on a stock with a Beta of zero under the Capital Asset…

A: CAPM is Capital Asset Pricing Model, used to calculated required return of stock based on 3…

Q: Assume a stock has a required return on equity, ?? = 12%. The risk-free rate is ?? = 5% and the…

A: The mathematical equation for the concept is:

Q: Let r be the expected return of stock i, rRE represent the risk-free rate, b represent the Beta of a…

A: Capital Asset Pricing Model: The CAPM explains the relationship between expected return and…

Q: 1. The market and Stock A have the following probability distributions: Return on Return on…

A: Coefficient of Variation = Standard Deviation / Average Return

Q: According to the CAPM, what is the expected market return given an expected return on a security of…

A: Details given are : Expected return on security = 15.8% Beta = 1.2 Risk free rate (Rf) = 5% We need…

Q: Determine graphically the beta coefficients for Stocks A and B. b. Graph the Security Market Line,…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: The expected return on the market is the risk-free rate plus the A. diversified returns B.…

A: According to CAPM model: expected return=rf+beta×rm-rfwhere,rf=risk free raterm=market return

Q: If Stock A has a lower expected return than Stock B, which of the following statements is least…

A: Beta is a measure of systematic risk for the company or security. It is the risk measure to show to…

Q: Assume that using the Security Market Line the required rate of return (RA) on stock A is found to…

A: As per the above consideration The ratio of expected return on A and expected return on B is

Q: . The difference between the expected (c equired) return for the market portfolio ar he risk-free…

A: This pertains to the CAPM (capital asset pricing model). The difference between expected return on a…

Q: The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and…

A: Covariance: It is a tool that helps in judging the movement of two options. If the covariance…

Q: b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and…

A: Correlation determines how assets move in relation to each other. A coefficient of 1 means a perfect…

Q: What is a characteristic line? How is this line usedto estimate a stock’s beta coefficient? Write…

A: Characteristic line With the help of regression analysis, a straight line is being formed which…

Q: How do you find the market risk premium and market expected return given the expected return of…

A: The rate of return earned by the investor over the risk-free rate of return is considered as market…

Q: The risk-free rate is 5.6%, the market risk premium is 8.5%, and the stock’s beta is 2.27. What is…

A: The risk-free rate is 5.6%, beta is 2.27 and market risk premium is 8.5%. Capital Asset Pricing…

Q: A stock's contribution to the market risk of a well-diversified portfolio is called risk. It can be…

A: Total risk can be measured as systematic risk and unsystematic risk.

Q: What are the components of the risk-free rate and What is financial risk? If the standard deviation…

A: According to the rule, because you have posted multiple questions, we will answer the first question…

Q: According to the CAPM, what is the market risk premium given an expected return on a security of…

A: Market risk premium = ( Expected return - risk free rate ) / beta

Q: a. Determine graphically the beta coefficients for Stocks A and B. b. Graph the Security Market…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

Q: A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%.…

A: Required return = risk free rate + beta*market risk premium 11 = 4 + beta*7

Q: Stock A and B have the following probability distributions of expected future returns: Probability…

A: Answer: Expected rate of return for stock A is 15%. Standard deviation of stock B is 24%.

Q: The risk-free rate is 2.58% and the market risk premium is 4.31%. A stock with a β of 1.22 will have…

A: Introduction: The term expected return refers to the anticipated loss or gain by an investor from…

Q: When working with the CAPM, which of the following factors can be determined with the most…

A: As per the Capital Assets Pricing Model: Rf denotes to Risk-Free Rate of Return MRp denotes the…

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: Calculation of ratio of beta of A to beta of B: Answer: The ratio of beta A to beta B is 0.4286

Q: E(FAssume that using the Security Market Line (SML) the required rate of return (RA) on stock A is…

A: There are various models which shows the relation of return (benefit) and risk. SML is one of them,…

Q: for all return horizons. Explain

A: Sharpe ratio refers to the concept of evaluating the risk linked with an investment or a portfolio's…

Q: Suppose you have the following expectations about the market condition and the returns on Stocks X…

A: Given:

Q: A stock with a beta of zero would be expected to have a rate of return equal to Group of answer…

A: Solution:- Discussion if A stock with a beta of zero would be expected to have a rate of return…

Q: Stock M has a relevant risk equals 1.75, and unsystematic risk equals 2. If the real risk-free rate…

A: RRR adjusted for inflation = [(1+RRR)/(1-i)] - 1 where RRR is Required Rate of Return = Risk Free…

Q: Beta for stock AAA=0, so, A) stock AAA's return = the return of the market portfolio. B) stock…

A: The question is based on the concept of risk and return relationship, Beta of any stock represents…

Q: Assume that the risk-free and rate is 5.50% and the market risk premium is 7.75%. What is the…

A: Market risk premium refers to the difference between the expected return for the overall stock…

Q: The standard deviation of a stock’s return is a measure of its? Multiple Choice systematic…

A: Financial management consists of directing, planning, organizing and controlling of financial…

Q: A stock has a required return of 11%, the risk- free is 7%, and the market risk premium is 4%. a.…

A: In this problem we require to calculate the beta of the stock and the revised required rate of…

Q: Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found…

A: Calculation of ratio of beta of A to beta of B: Answer: The ratio of beta A to beta B is 0.4286

Q: We have the following information on Stocks A and B. The risk-free rate is S the market risk premium…

A: Stock is overpriced when the expected return is less than required rate and when stock is…

Q: Find beta, and determine the risk premium

A: Risk premium is the beta times the difference between the market return and the risk free rate of…

Q: According to the CAPM, what is the expected return on a security given market risk premium of 13%, a…

A: CAPM(capital asset pricing model) is used to evaluate cost of equity According to it cost of equity…

Concept explainers

Classification Of Risk

Risk means when there could be a possibility that the returns expected from a particular project or investment may or may not match the investor's expectations. In other words, the uncertainty of an income arising from a source that would either be lower than expected or result in losses in risk exposure of the project. The higher the risk involved, the higher is the return expected by the investor as the investor is exposed to a high level of risk. There are various methods by which different types of risk can be assessed and avoided or mitigated.

Question

A stock's risk premium is equal to the:
expected market risk premium times beta.
expected market risk premium multiplied by beta plus the risk-free return.
Risk-free return plus expected market return.
expected market return times beta.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Introduction to Question :

VIEW

Step 2: Answer:

VIEW

Step 3: Explanation for Incorrect options:

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium. ..... True False
1. Beta is positively related A. the degree of correlation between a stock's return and the market return B. the systematic risk of a stock C. risk premium required by the stock D. all of the above
c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is found to be half of the required return (Rs) on stock B. The risk-free rate (R:) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (Ba) to beta of B (B).
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be halfof the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A(A) to beta of B(B).
The slope of the Security Market Line equals to ____, and the slope of Capital Allocation Line equals to____. Select one: A. Beta; Sharpe Ratio B. Market Risk Premium; Sharpe Ratio C. Risk free rate; Volatility D. Market Risk Premium; Volatility
Question: Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A to beta of B.
The additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. a. Market Risk Premium b. Risk-free rate С. Stock's beta O d. Security Market Line e. Required Return on Stock
The expected return on the market is the risk-free rate plus the A. diversified returns B. equilibrium risk premium C. historical market return D. unsystematic return
The expected return on the market is the risk-free rate plus the A. diversified returns B. equilibrium risk premium C. historical market return D.unsystematic return
Questions C and D is required. c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B (B). d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i ( , where are standard deviations of asset i and market portfolio, is the correlation between asset i and the market portfolio)
How do you find the market risk premium and market expected return given the expected return of stock, beta, and risk free rate? Example: The expected return of a stock with a beta of 1.2 is 16.2%. Calculate the market risk premium and the market expected return, given a risk-free rate of 3%.
Assume that using the Security Market Line(SML) the required rate of return(RA)on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourthof the required return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A(A) to beta of B(B).