A stock's risk premium is the extra return above the risk free rate.  You can see it in the CAPM formula.

Also, the fair return is the one that is given from the CAPM. The market's expected return is based on the current price of the stock and expected cash flows (HPR)?

Q 1. 

1.   A. A stock is currently selling for $94.90 and is expected to sell for $104.21 in 1 year.  If the company pays a dividend of $0.55 what is the stock's HPR?
2. 
   
3. B. A stock has a beta of 0.79.  The risk free rate is 1.694% and the market risk premium is 5%.  What is the fair return on the stock? 

Answer rating: 100% (QA)

10 HPR income End of period intial value Value ... View the full answer