You own $21,600 of Denny’s Corp stock that has an assumed beta of 3.32. You also

Question

You own $21,600 of Denny’s Corp stock that has an assumed beta of 3.32. You also own $28,620 of Qwest Communications (assumed beta = 1.84) and $3,780 of Southwest Airlines (assumed beta = 1.11). Assume that the market return will be 11.0 percent and the risk-free rate is 2.0 percent. What is the market risk premium?

What is the risk premium of each stock? (Round your answers to 2 decimal places.)

What is the risk premium of the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Explanation / Answer

Market Risk Premium = Market Return- Risk Free Rate 11- 2 Market Ris Premium = 9% Calculation of the expected Return Expected Return = Risk Free Rate+ Beta* Market Risk Premium Denny 2+3.32*9 31.88 Qwest 2+1.84*9 18.56 Southwest Airlines 2+1.11*9 11.99 Risk Premium of each stock Denny 31.88-2 29.88% Qwest 18.56-2 16.56% Southwest Airlines 11.99-2 9.99%

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