If an average share of stock is expected to yield a return of 7.2% and comparable Treasury bonds yield a return of 3.6%, what is the market risk premium? Give your answer in percentage terms to one decimal place accuracy.

If an average share of stock is expected to yield a return of 7.2% and comparable Treasury bonds yield a return of 3.6%, what is the market risk premium? Give your answer in percentage terms to one decimal place accuracy.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter7: Valuation Of Stocks And Corporations

Section7.4: Valuing Common Stocks

Problem 3ST

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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

If an average share of stock is expected to yield
a return of 7.2% and comparable Treasury
bonds yield a return of 3.6%, what is the
market risk premium? Give your answer in
percentage terms to one decimal place
аccuracy.

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