Question

Nike’s common stock has a beta of 0.8 and a required return of 10.6% according to the CAPM. The market risk premium is 7%. Given the information above, what is the risk-free rate?

a) 3.8%
b) 6.8%
c) 7.8%
d) 10.6%

Answer 1

The risk-free rate can be calculated using the capital asset pricing model (CAPM) formula.

Step-by-step explanation:

To find the risk-free rate, we need to use the formula for the capital asset pricing model (CAPM).

CAPM = Rf + beta × (Rm - Rf)

Here, Rf is the risk-free rate, beta is the stock's beta, Rm is the market return, and Rf is the risk-free return.

Given that the stock's beta is 0.8 and the required return is 10.6%, and the market risk premium is 7%, we can rewrite the formula as:

10.6% = Rf + 0.8 × 7%

Solving for Rf, we find that the risk-free rate is 3.8%.