Question

Stock Y has a beta of 1.45 and an expected return of 16.3 percent. Stock Z has a beta of .90 and an expected return of 12.6 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

Answer 1

risk free rate= 6.55%

Step-by-step explanation:

expected return= risk-free rate +Beta*(Market rate- risk-free rate )

Stock Y

16.3=Rf+1.45(Rm-Rf)

16.3=1.45Rm-0.45Rf

Rm=(16.3+0.45Rf)/1.45

Stock Z

12.6=Rf+0.9*(Rm-Rf)

12.6=0.9Rm+0.1Rf

12.6=0.9(16.3+0.45Rf)/1.45+0.1Rf

risk free rate=(12.6-10.11724138)/(0.279310344+0.1)

risk free rate= 6.55%