Efuru believes that anyone who holds the stock of PYK Co. should earn a risk premium of 4 percent. If the risk-free rate is 2.5 percent, what return is Efuru expecting? Assume the stock is as risky as the market.

Efuru believes that anyone who holds the stock of PYK Co. should earn a risk premium of 4 percent. If the risk-free rate is 2.5 percent, what return is Efuru expecting? Assume the stock is as risky as the market.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 14P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Efuru believes that anyone who holds the
stock of PYK Co. should earn a risk premium
of 4 percent. If the risk-free rate is 2.5
percent, what return is Efuru expecting?
Assume the stock is as risky as the market.

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