the beta is 1 the beta is 1
If the required rate of return is 11 the risk free rate is 7 and the market risk premium is 4 If the market risk premium increased to 6 percent what would happen to the stocks required rate of return?
4.25 + 1.4(5.5) = 11.95 = required rate of return the correct answer is: 4.25 + 1.4 (5.50-4.25) = 21.75
.14=.05+1.5(market return-.05) .09=1.5market return-.075 .165/1.5=market return .11 or 11%=market return
The market risk premium is measured by the market return less risk-free rate. You can calculate the market risk premium as market risk premium is equal to the expected return of the market minus the risk-free rate.
Expected return= risk free rate + Risk premium = 11 rate of return on stock= Riskfree rate + beta x( expected market return- risk free rate)
RoR = Rf + beta x Rp where, RoR = Required Rate of return Rf = Risk free Rate Rp = Risk Premium so Ror - 19%
1. real rate of return 2. inflation premium 3. risk premium
This should be correct in a perfect market. Not true usually as assets are often mis priced. Expected return is the return/discount that market is using to get the value of the asset while required return is the discount / return that gets you the true intrinsic value of an asset
On average, the only return that is earned is the required return-investors buy assets with returns in excess of the required return (positive NPV), bidding up the price and thus causing the return to fall to the required return (zero NPV); investors sell assets with returns less than the required return (negative NPV), driving the price lower and thus the causing the return to rise to the required return (zero NPV).