Stock Y has a beta of 1.4 and an expected return of 13 percent. Stock Z has a beta of 0.85 and an expected return of 10.4 percent. Required: What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Risk-free rate %
We need to set the reward-to-risk ratios of the two assets equal to each other, which is:
(0.13 – Rf) / 1.4 = (0.104 – Rf) / 0.85
We can cross multiply to get:
0.85(0.13 – Rf) = 1.4(0.104 – Rf)
Solving for the risk-free rate, we find:
0.1105 – 0.85Rf = 0.1456 – 1.4Rf
Rf = 0.0638, or 6.38%
Stock Y has a beta of 1.4 and an expected return of 13 percent. Stock Z...
Stock Y has a beta of 1.4 and an expected return of 13 percent. Stock Z has a beta of 0.85 and an expected return of 10.4 percent. Required: What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Risk-free rate % Suggestions: We need to set the reward-to-risk ratios of the...
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