Which of the following equations is correct? A. Discount rate = Risk-free rate – Risk premium...

Which of the following equations is correct?

A. Discount rate = Risk-free rate – Risk premium

B. Discount rate = Risk-free rate ? Risk premium

C. Discount rate = Risk-free rate ÷ Risk premium

D. Discount rate = Risk-free rate + Risk premium

Solutions

Expert Solution

Answer is option D,
Ie Discount rate = Risk-free rate + Risk premium

If we remove Beta from CAPM equation (Rf+Beta(Risk premium)), we will reach to above equation.

Risk premium is nothing but Market rate of return (-) Risk free rate

ekkarill92 answered 1 year ago

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