CFA Practice Question
Given that the risk premium on the market is 14%, and the beta on an asset is 0, what would be the risk premium on the asset?
A. 0%
B. 2%
C. Not enough information
Explanation: In order to obtain an asset's risk premium, one should multiply the market risk premium by the asset's beta. In this example, this would yield 14% x 0 = 0. The beta of 0 on the asset signifies that it has no systematic risk (which is the only measure of risk that is relevant, according to the capital market theorem). A riskless asset will not have a risk premium.
User Contributed Comments 4
| User | Comment |
|---|---|
| ontrack | tricky. i thought we cant get the rate as we dont know the risk free rate. |
| takor | when beta is 0, the SML intercepts the E(Ri) axis at the RFR, at which point E(Ri)=RFR; risk premium=E(Ri)-RFR=0 |
| uviolet | ontrack, the question asks for risk premium which is beta * market risk premium. |
| GBolt93 | yeah, ontrack to be clear we don't need the rfr as we're given market premium, not market return. If beta was 0.5 the risk premium on the asset would be 14x.5=7% |