Question

If the expected return on the market is​ 11% and the expected return of investing in Merck is​ 10.35%, then the riskminus−free rate must​ be: A. ​5.0% B. ​4.0% C. ​3.0% D. ​4.5%

Answer 1

The answer is given below;

Step-by-step explanation:

Ra=Rf+(Rm-Rf)*Ba

Rm=11%

Ra=10.35%

Ba=.9 it is assumed that beta is .9 for merck

Rf=?

By putting values in above formula we get

10.35%=Rf+(11%-Rf)*.9

10.35%=Rf+.9*11%-.9Rf

10.35%=.1Rf+.099

.1Rf=10.35%-9.9%

Rf=.45%/.1

Rf=4.5%