Question

The expected return on Karol Co. stock is 16.5 percent. If the risk-free rate is 5 percent and the beta of Karol Co is 2.3, then what is the risk premium on the market portfolio?

A) 2.5%
B) 5.0%
C) 7.5%
D) 10.0%

Answer 1

The risk premium on the market portfolio is 11.5%.

Step-by-step explanation:

The risk premium on the market portfolio can be calculated using the formula:

Risk Premium = Expected Return - Risk-Free Rate

In this case, the expected return on Karol Co. stock is 16.5% and the risk-free rate is 5%. Therefore, the risk premium on the market portfolio is 16.5% - 5% = 11.5%.

Therefore, the correct answer is D) 10.0%.