What is the market risk premium (rM - rRF)? Consider the following information for three stocks, Stock A, Stock B, and Stock C.The returns on each of the three stocks are positively correlated, but they are notperfectly correlated. (That is, all of the correlation coefficients are between 0 and 1.)ExpectedReturn10%1012StandardStockStock AStock BStock CDeviation20%20Beta1.01.0201.4Portfolio P has half of its funds invested in Stock A and half invested in Stock B.Portfolio Q has one third of its funds invested in each of the three stocks. Therisk-free rate is 5 percent, and the market is in equilibrium. (That is, required returnsequal expected returns.)

The market risk premium can be found using the CAPM Model As per CAPM Model, expected return = Risk…

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What is the market risk premium (rM - rRF)?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 3P: Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 40%. Stock B...

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Concept explainers

Classification Of Risk

Risk means when there could be a possibility that the returns expected from a particular project or investment may or may not match the investor's expectations. In other words, the uncertainty of an income arising from a source that would either be lower than expected or result in losses in risk exposure of the project. The higher the risk involved, the higher is the return expected by the investor as the investor is exposed to a high level of risk. There are various methods by which different types of risk can be assessed and avoided or mitigated.

Question

What is the market risk premium (rM - rRF)?

Consider the following information for three stocks, Stock A, Stock B, and Stock C.
The returns on each of the three stocks are positively correlated, but they are not
perfectly correlated. (That is, all of the correlation coefficients are between 0 and 1.)
Expected
Return
10%
10
12
Standard
Stock
Stock A
Stock B
Stock C
Deviation
20%
20
Beta
1.0
1.0
20
1.4
Portfolio P has half of its funds invested in Stock A and half invested in Stock B.
Portfolio Q has one third of its funds invested in each of the three stocks. The
risk-free rate is 5 percent, and the market is in equilibrium. (That is, required returns
equal expected returns.)

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