Question

Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called

Answer 1

Answer:

Market risk premium

Explanation:

The excess return in this scenario is known as market risk premium.

The formula for cost of equity under CAPM is stated thus:

cost of equity=risk-free+beta*(market return-risk free rate)

market risk premium=(market return-risk free rate)

This is the extra return earned for taking an increased risk which is inherent in stock