The Two-Factor Model on a Stock Provides a Risk Premium

question 28

Multiple Choice

The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock?

• A) 11.6%
• B) 13%
• C) 15.3%
• D) 19.5%

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Definitions:

Iroquois

A historically powerful and influential group of Native American tribes in the northeastern United States, known for their confederacy or league, which played a strategic role in colonial American history.

Northeast

A region in the United States encompassing the northern eastern states, characterized by distinct seasons and dense population centers.

Powerful Tribe

A term referring to a socially, militarily, or economically dominant group within a larger society or region.

Commercialization

Commercialization involves the process of bringing new products or services to the market, turning them into a profitable venture by maximizing sales and distribution.