Question

a stock has a beta of 1.5 and an expected return of 16.35%. What is the risk free rate if the markert rate of return is 12.5%

Answer 1

4.8%

Step-by-step explanation:

Calculation for the risk free rate if the market rate of return is 12.5%

Using this formula

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

Let plug in the formula

0.1635 =Risk-free rate of return + 1.5(0.125 -Risk free rate of return)

0.1635 =Risk-free rate of return + 0.1875 - 1.5(Risk-free rate of return)

0.1635 - 0.1875 =Risk-free rate of return - 1.5Risk-free rate of return

−0.024 = - (1-0.5 Risk-free rate of return)

−0.024 = - 0.5 Risk-free rate of return

Risk-free rate of return =0.024 / 0.5

Risk-free rate of return = 0.048

Risk-free rate of return = 0.048 * 100%

Risk-free rate of return = 4.8%

Therefore the risk free rate if the market rate of return is 12.5% is 4.8%