Question

Problem 11-15 Using CAPM A stock has an expected return of 10.5 percent, a beta of 1.55, and the expected return on the market is 8.5 percent. What must the risk-free rate be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.G., 32.16.)

Answer 1

the risk free rate of return is 4.86%

Explanation:

The computation of the risk free rate is shown below;

As we know that

Expected return = Risk free rate of return + Beta × (Market rate of return - risk free rate of return)

10.5% = Risk free rate of return + 1.55 × (8.5% - Risk free rate of return)

10.5% = Risk free rate of return + 13.175% - 1.55 Risk free rate of return

10.5% - 13.175% = -0.55 risk free rate of return

-2.675% = -0.55 risk free rate of return

So, the risk free rate of return is

= 2.675% ÷ 0.55

= 4.86%

Hence, the risk free rate of return is 4.86%