Expected return on stock = Risk-free rate + Beta*Risk premium
Note: Market return - Risk-free rate = Risk premium

Expected return on stock = Risk-free rate + Beta*(Market return - Risk-free rate)
12% = 6% + 1.5(10% - 6%)
Market return = (12% - 6%)/1.5 + 6% = 10%

Risk premium = Market return - Risk-free rate = 10% - 6% = 4%

Things to Remember

• Market Risk Premium is the excess return expected from an investment in a risky asset over the risk-free rate.
• Beta measures the sensitivity of a stock's returns to the market returns. A beta of 1 indicates that the stock's price will move with the market.
• Risk-free rate is the theoretical rate of return of an investment with zero risk of financial loss.
• Expected return on a stock can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected return = Risk-free rate + Beta*(Market return - Risk-free rate).
• Market return is the return on the overall market portfolio.