Expected return: Expected return of the market refers to the return earned from the market over and above the risk-free rate of return . Risk-free rate of return, is the return that an investor must demand for inflation and the time-value of money, even when there is hardly any risk of any financial loss. Risk premium varies with the systematic risk in an investment. It is the market risk premium multiplied by the beta (ß) of a security. It is determined as the market risk premium multiplied by the beta of the security. The market risk premium is equal to the expected market return less the return earned from risk-free security. The excess return can be calculated as per the Capital Asset Pricing Model , using the formula given below. Where, is the expected return. is the risk free rate of return. is the beta of the asset. is the expected return of the market. To determine: The sign of the risk premium of a negative-beta stock.

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Chapter 12, Problem 26P

Summary Introduction

Expected return:

Expected return of the market refers to the return earned from the market over and above the risk-free rate of return. Risk-free rate of return, is the return that an investor must demand for inflation and the time-value of money, even when there is hardly any risk of any financial loss. Risk premium varies with the systematic risk in an investment. It is the market risk premium multiplied by the beta (ß) of a security. It is determined as the market risk premium multiplied by the beta of the security. The market risk premium is equal to the expected market return less the return earned from risk-free security.

The excess return can be calculated as per the Capital Asset Pricing Model, using the formula given below.

Where,

is the expected return.

is the risk free rate of return.

is the beta of the asset.

is the expected return of the market.

To determine:

The sign of the risk premium of a negative-beta stock.

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