Stock Y has a beta of 1.30 and an expected return of 13.35 percent. Stock Z...

Question

Question

Stock Y has a beta of 1.30 and an expected return of 13.35 percent. Stock Z has a beta of 0.50 and an expected return of 8 pe

Answer 1

Answer #1

Expected return=risk free rate+beta*(market rate-risk free rate)

13.35=Rf+1.3*(Rm-Rf)

13.35=1.3*Rm-0.3Rf

Rm=(13.35+0.3Rf)/1.3

Also:

8=Rf+0.5*(Rm-Rf)

8=0.5*Rm+0.5Rf

8=0.5*(13.35+0.3Rf)/1.3+0.5Rf

8=5.13461538+0.115384615Rf+0.5Rf

Rf=(8-5.13461538)/(0.115384615+0.5)

=4.66%(Approx)=risk free rate

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Answer 2

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