Expected return on the asset-market risk premium

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Reference no: EM13814694

1. Consider an asset that has a beta of 1.20. If the risk-free rate is 2.0% and the market risk premium is 3%, expected return on the asset is:

A. 5.0%

B. 6.2%

C. 3.2%

D. 5.6%

2. Assume that you are a U.S. investor who is considering investments in the German (Stocks A) and British (Stocks B) stock markets. The world market risk premium is 4.5%. The currency risk premium on the euro is 1%, and the currency risk premium on the pound is −1%. In the United States, the interest rate on one-year risk-free bonds is 4%. In addition, you are provided with the following information:

Stock A B

Country Germany United Kingdom

βw 1.5 1

γ€ 1 −0.25

γ£ −0.25 1.0

Expected return for stock B is: (The U.S. dollar is the base currency).

A. 12%

B. 9.25%

C. 9.75%

D. 7.25%

Reference no: EM13814694

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