Answer: 4%

## Explanation Using the Capital Asset Pricing Model (CAPM): **Formula:** Expected return on stock = Risk-free rate + Beta × (Market return - Risk-free rate) **Given:** - Expected return on stock = 12% - Risk-free rate = 6% - Beta = 1.5 - Market return = 10% **Calculation:** \[12\% = 6\% + 1.5 \times (10\% - 6\%)\] \[12\% = 6\% + 1.5 \times 4\%\] \[12\% = 6\% + 6\%\] \[12\% = 12\%\] ✓ The market risk premium is defined as: \[\text{Market Risk Premium} = \text{Market Return} - \text{Risk-free Rate}\] \[\text{Market Risk Premium} = 10\% - 6\% = 4\%\] Therefore, the market risk premium is **4%**, which corresponds to option B.

Author: Tanishq Prabhu