Consider the following information for Stocks A$,$ B$,$ and C$.$ The returns on the three stocks, while positively correlated, are not perfectly correlated.

The risk$-$free rate is $5\mathrm{.}50\%.$

Stock

Expected Return

Standard Deviation

Beta

A $7\mathrm{.}75\%15\%0\mathrm{.}9$

B $8\mathrm{.}50\%15\%1\mathrm{.}2$

C $9\mathrm{.}25\%15\%1\mathrm{.}5$

Let ri

be the expected return of stock i

$,$ rRF

represent the risk$-$free rate, b

represent the Beta of a stock, and rM

represent the market return.

Assume that the market is in equilibrium, with the required rate of returns equal to expected returns.

According to the video, which equation most closely describes the relationship between required returns, beta, and the market risk premium?

ri$=$rRF$+$b$\backslash$times $($rM$$rRF$)$

ri$=$rRF$$b$\backslash$times $($rM$$rRF$)$

ri$=$rRF$+$b$\backslash$times $($rM$+$rRF$)$

ri$=$rRF$+$brM$$rRF

Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.

Using the equation you just identified, you can solve for the market risk premium which, in this case, equals approximately $.$Consider the following information for Stocks A$,$ B$,$ and C$.$ The returns on the three stocks, while positively correlated, are not perfectly

correlated.

The risk$-$free rate is $5\mathrm{.}50\%.$

Let $r_i$ be the expected return of stock $i,r_{RF}$ represent the risk$-$free rate, $b$ represent the Beta of a stock, and $r_M$ represent the market return.

Assume that the market is in equilibrium, with the required rate of returns equal to expected returns.

According to the video, which equation most closely describes the relationship between required returns, beta, and the market risk premium?

$r_i=r_{RF}+b(r_M-r_{RF})$

$r_i=r_{RF}-b(r_M-r_{RF})$

$r_i=r_{RF}+b(r_M+r_{RF})$

$r_i=r_{RF}+\frac{b}{r_M-r_{RF}}$

Hint: Recall that because the market is in equilibrium, the required rate of return is equal to the expected rate of return for each stock.

Using the equation you just identified, you can solve for the market risk premium which, in this case, equals approximately