Louisiana State University, Shreveport FIN FIN 701 How did we come up with the RPm of 0.105? also why did we divide…
How did we come up with the RPm of 0.105? also why did we divide 0.105 by beta instead of multiplying in this case?
Port Inc.’s stock has a required return of 12.5%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 2%, what is the market risk premium?
𝒓𝑪𝒐𝒐𝒍 = 𝒓𝑹𝑭 + (𝒓𝑴 − 𝒓𝑹𝑭)𝜷𝑪𝒐𝒐𝒍
(𝒓𝑴 − 𝒓𝑹𝑭) = market risk premium, a.k.a. RPm
0.125 = 0.02 + (RPm)*1.25
0.105 = (RPm)*1.25
0.105 = RPm
0.084 = RPm
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