Question

The expected return on Mike's Seafood stock is 17.9 percent. If the expected return on the market is 13 percent and the beta for Kiwi is 1.7, then what is the risk-free rate?

A) 4.5%
B) 5.0%
C) 5.5%
D) 6.0%

Answer 1

To find the risk-free rate, we can use the Capital Asset Pricing Model (CAPM), which requires the expected return on the stock, the expected return on the market, and the beta. Using the given values, we can calculate the risk-free rate to be approximately 16.3%.

Step-by-step explanation:

To find the risk-free rate, we can use the Capital Asset Pricing Model (CAPM). The formula for CAPM is:

Expected Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate)

Using the given information:

• Expected Return on Mike's Seafood stock = 17.9%
• Expected Return on the market = 13%
• Beta for Kiwi = 1.7

Plugging the values into the CAPM formula:

17.9% = Risk-Free Rate + 1.7 * (13% - Risk-Free Rate)

Simplifying the equation:

17.9% = Risk-Free Rate + 1.7 * 13% - 1.7 * Risk-Free Rate

Combine like terms:

17.9% = 13% + 0.3 * Risk-Free Rate

Subtract 13% from both sides:

4.9% = 0.3 * Risk-Free Rate

Divide both sides by 0.3:

Risk-Free Rate = 4.9% / 0.3 = 16.33%

Rounding to the nearest tenth, the risk-free rate is approximately 16.3%.