Reference no: EM133629949

Question

The risk-free rate is the yield on a safe investment, like government bonds. The risk-free rate in this case is represented by the 5% return on Government of Canada Treasury bills. The market risk premium is the amount that separates the projected return on the market from the risk-free rate. In this case, the market risk premium is 15% - 5% = 10%. * Market Risk Premium + Beta * Risk-Free Rate = Expected Return 20% is the expected return (5% + 1.5 * 10%). According to the CAPM study, the expected return of the stock (20%) is higher than the risk-free rate (5%) and the anticipated market return (15%). This suggests that Diana's consideration of buying the stock is warranted because it is expected to perform better than the market. The CAPM analysis indicates that Diana should be thinking about purchasing the stock because its expected return is higher than the risk-free rate and the expected market return. In addition to the stock's risk, she should take her own risk tolerance and investing goals into account before making a decision.