Question

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

Answer: 4.86%

Explanation:

The Capital Asset Pricing Model can be used;

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

10.5% = Rf + 1.55 * (8.5% - Rf)

10.5% = Rf + ‭0.13175‬ - 1.55Rf

10.5% - ‭0.13175‬ = -0.55Rf

‭-0.02675‬ = -0.55Rf

Rf = ‭-0.02675‬/-0.55

= 0.0486

= 4.86%