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A stock with a beta of 1.32 is expected to return 14.57% next year. If the...

A stock with a beta of 1.32 is expected to return 14.57% next year. If the expected market return is 11.50%, what is the expected risk free rate?

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Answer #1

The expected risk free rate is computed as shown below:

Expected return = Risk free rate + Beta ( Return on market - Risk free rate )

Expected return = 14.57% or 0.1457

Beta = 1.32

Return on market = 11.50% or 0.1150

Plugging these values in the above mentioned formula, we shall get:

0.1457 = Risk free rate + 1.32 ( 0.1150 - Risk free rate )

Risk free rate = 1.90625%

Feel free to ask in case of any query relating to this question

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