Question
The current expected risk-free rate is 4%, the equity
premium is 3.9% and the beta is 0.8. calculate the return on equity.Solution
According to CAPM return on equity = Risk-free rate + beta (market rate – risk-free rate) market rate – risk-free rate = market premium Therefore, return on equity is: 0.04 + 0.8(0.039) = 0.0712 ~7.12%
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