According to 'Capital Asset Pricing Model - CAPM' ^^:
Expected Rate of Return = Risk Free Return + Beta(Market Rate of Return - Risk Free Return) # ....... OR
#Bracket portion is the Market Risk Premium
Expected Rate of Return = Risk Free Return + Beta(Market Risk Premium) ....... By substituting values, we get:
14.91% = 5%+ 2(Market Risk Premium) .... Dividing both sides by 2, we get:
(14.91% )/2= (5%)/2+Market Risk Premium OR
7.455% = 2.5%+Market Risk Premium OR
7.455% - 2.5% = Market Risk Premium OR
4.955% = Market Risk Premium .
^^ http://www.investopedia.com/terms/c/capm... .
A stock has an expected return of 14.91 percent. The beta of the stock is 2.0 and the risk-free rate is 5 percent. What is the market risk premium?
