Question

A stock has an expected return of 15 percent, its beta is 1.70, and the expected return on the market is 10.8 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate %

Answer 1

Answer:

Expected return of Stock, E(S) = 15%

Beta of the stock, b= 1.7

Expected return of the market, E(M) = 10.8%

So by using CAPM model:

E(S) = Rf + {E(M) – Rf} x b

So,

15% = Rf + {10.8% - Rf} x 1.7

0.15 = Rf + 0.1836 – 1.7Rf

Rf = 0.048 or 4.8%

So the risk free rate = 4.8%