Suppose you observe the following situation: state of economy probability of state of economy rate of return if state occurs stock a stock b boom .21 .189 .097 normal .74 .158 .076 recession .05 - .246 .042 assume the capital asset pricing model holds and stock a's beta is greater than stock b's beta by .84. what is the expected market risk premium?

a. 10.06 percent
b. 8.28 percent
c. 7.81 percent
d. 9.05 percent
e. 7.94 percent

C. 7.81%

Explanation:

Stock A and Stock B expected Return shall be calculated using the following formula:

Stock A/B expected [email protected]*Return at [email protected]*Return at [email protected]*Return at Recession.

Stock A return=0.21*18.9%+0.74*15.8%+0.05*-24.6%

                       =14.43%

Stock B return=0.21*9.7%+0.74*7.6%+0.05*4.2%

                       =7.87%

Market risk premium=(Stock A Return- Stock B return)/0.84

Market risk premium=(14.43%-7.87%)/0.84=7.81%

So Based on the above explanation, the answer shall be C. 7.81%

i'ts proportional. if the inflation rate is 12% for example, the cpi will be 12% less.

hope it ,

bioteacher101

answerup to (3) three years;