Question

# The common stock of Jensen Shipping has a premium of 7.65 percent. What is the market...

The common stock of Jensen Shipping has a premium of 7.65 percent. What is the market risk-premium if the company's beta is 0.85? What is expected return on the market if the risk-free return is 4.00 percent?

A. Risk premium is 9.50 percent; Market expected return is 5.50 percent

B. Risk premium is 9.75 percent; Market expected return is 5.75 percent

C. Risk premium is 8.70 percent; Market expected return is 4.70 percent

D. Risk premium is 6.502 percent; Market expected return is 10.502 percent

E. Risk premium is 9.00 percent; Market expected return is 13.00 percent

The answer is D.

Market risk-premium = premium of common stock*beta = 7.65%*0.85 = 6.502%

Market risk premium = expected market return - risk-free rate

Expected market return = market risk premium + risk-free rate = 6.502% + 4% = 10.502%

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