Answer:
The market risk premium is 5.8%
Explanation:
Expected return = 12.25%
Stock beta = 1.25
Risk free rate = 5%
Expected return = risk free rate + stock Beta ( market risk − risk free rate)
12.25% = 5% + 12.5% ( rm− 5%)
0.1225 = 0.05 + 1.25 ( rm− 0.05)
0.1225 - 0.05 = 1.25 ( rm− 0.05)
0.0725 = 1.25 ( rm− 0.05)
0.0725 / 1.25 = rm− 0.05
0.058 + 0.05 = rm
rm = 0.108
Market Risk = 10.8%
Market Risk Premium = 10.8% - 5% = 5.8%
