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    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.
    A 7.12% Correct Answer Incorrect Answer
    B 8.12% Correct Answer Incorrect Answer
    C 7.9% Correct Answer Incorrect Answer
    D 7.1% Correct Answer Incorrect Answer
    E 7% Correct Answer Incorrect Answer

    Solution

    According to CAPM return on equity = Risk-free rate + beta (market rate тАУ risk-free rate) market rate тАУ risk-free rate = market premium Therefore, return on equity is: 0.04 + 0.8(0.039) = 0.0712 ~7.12%

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