Question

Consider an asset that has a beta of 1.25. If the risk free rate is 3.25 and the mrket risk premium is 5.5% caculate the expected return on the asset.

Answer 1

10.125%

Step-by-step explanation:

The formula to compute the expected return on the asset is shown below:

Expected return on the asset = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 3.25% + 1.25 × 5.5%

= 3.25% + 6.875%

= 10.125%

The (Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is used in the computation part