1. Consider an asset that has a beta of 1.20. If the risk-free rate is 2.0% and the market risk premium is 3%, expected return on the asset is:
A. 5.0%
B. 6.2%
C. 3.2%
D. 5.6%
2. Assume that you are a U.S. investor who is considering investments in the German (Stocks A) and British (Stocks B) stock markets. The world market risk premium is 4.5%. The currency risk premium on the euro is 1%, and the currency risk premium on the pound is −1%. In the United States, the interest rate on one-year risk-free bonds is 4%. In addition, you are provided with the following information:
Stock A B
Country Germany United Kingdom
βw 1.5 1
γ€ 1 −0.25
γ£ −0.25 1.0
Expected return for stock B is: (The U.S. dollar is the base currency).
A. 12%
B. 9.25%
C. 9.75%
D. 7.25%