A stock has an expected return of 16 percent, its beta is 1.60, and the expected...

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A stock has an expected return of 16 percent, its beta is 1.60, and the expected...

A stock has an expected return of 16 percent, its beta is 1.60, and the expected return on the market is 12.4 percent. What must the risk-free rate be?

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Answer 1

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A stock has an expected return of 16 percent, its beta is 1.60, and the expected return on the market is 12.4 percent. What must the risk-free rate be?

Expected Return = Risk Free Rate + Beta(Market Rate - Risk Free Rate)

Let x = Risk Free Rate and plug in the numbers to get:

16% = x + 1.6(12.4% - x)

16 = x + 19.84 - 1.6x

-3.84 = -.6x

x = 6.4%

Risk Free rate is 6.4%

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