Final answer:
The risk-free rate is usually lower and is the return on an investment with zero risk, while the expected market rate of return is typically higher, reflecting the potential average return from riskier investments like stocks. Option 1) is the most plausible with a risk-free rate of 5% and an expected market rate of return of 11%.
Step-by-step explanation:
The risk-free rate is the return on an investment with zero risk, indicating the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The expected market rate of return is the average return anticipated on an investment in the stock market, which typically includes a wide range of investments such as stocks and can incorporate dividends and capital gains.
Given the options provided and the concepts of risk and return, the most plausible scenario would be option 1), with a risk-free rate of 5 percent and an expected market rate of return of 11 percent. This makes sense as investors typically demand a higher rate of return for investments that carry a higher level of risk compared to the risk-free rate.
The actual rate of return is the total return an investment has generated over a period, including interest, capital gains, dividends, and distributions realized over a given time frame.