Question
HOW TO CALCULATE THESE QUESTIONS? 1. The historical returns for the past three years for Stock B and the stock market portfolio were Stock B:
HOW TO CALCULATE THESE QUESTIONS?
1. The historical returns for the past three years for Stock B and the stock market portfolio were Stock B: 24 percent, 0 percent, 24 percent; market portfolio: 10 percent, 12 percent, 20 percent. If the risk-free rate is 4 percent, calculate the market risk premium.
A. 18.1 percent
B. 14.0 percent
C. 10.0 percent
D. 6.0 percent
2. The historical returns for the past three years for Stock B and the stock market portfolio were Stock B: 24 percent, 0 percent, 24 percent; market portfolio: 10 percent, 12 percent, 20 percent. The expected market return is 12 percent. Calculate the required rate of return (cost of equity) for Stock B using the CAPM. (The risk-free rate of return = 4%.)
A. 8.6 percent
B. 12.6 percent
C. 10.9 percent
D. 16.0 percent
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