The Risk Premium for a stock is the extra return that investors expect to earn, above what they could earn with no risk (the risk-free rate), for bearing the risk associated with the company. Using your expected returns from Question 5. and the attached data, the Risk Premium for Microsoft is and for Pepsi it is Example: 5.22, 3.20 Mark for Review What's This? Dem and "V" Recovery (Strong) WRecovery (Okay) U/L" Recovery (Weak) Probability 15% 60% 25% Return: Microsoft 25% 8% -20% Return: Pepsi 10% 3% -5% Company Microsoft Pepsi Standard Deviation, o 0.40 0.18 Risk-free rate, rf = 0.11% (this is the yield of US Government 3-Month T-bills)