Chance Inc's stock has an expected return of 10%, a beta of 1.7, and is in...

Chance Inc's stock has an expected return of 10%, a beta of 1.7, and is in

equilibrium. Assume the nominal risk-free rate is 4.00%.

(a) what is the market risk premium?

(b) What is the equity risk premium?

Expert Solution

(a) Expected Return = Risk-free Rate + Beta * Market Risk Premium

0.10 = 0.04 + 1.7 * Market Risk Premium

Market Risk Premium = (0.10 - 0.04) / 1.7

Market Risk Premium = 0.0353 or 3.53%

(b) Equity Risk Premium = Expected Return - Risk-free Rate

Equity Risk Premium = 10% - 4%

Equity Risk Premium = 6.00%

jeff jeffy answered 2 years ago

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