Stock Y has a beta of .98 and an expected return of 10.30 percent. Stock Z has a

Question

Stock Y has a beta of .98 and an expected return of 10.30 percent. Stock Z has a beta of .80 and an expected return of 9 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Stock Y has a beta of .98 and an expected return of 10.30 percent. Stock Z has a beta of .80 and an expected return of 9 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Stock Y: 10.30 = rf + 0.98*(rM - rf)
Stock Z: 9.0 = rf + 0.80*(rM - rf)

Simplified,

10.30 = 0.02*rf + 0.98*rM
9.0 = 0.2*rf + 0.8*rM

Multiply bottom equation by -0.98/0.8

10.30 = 0.02*rf + 0.98*rM
-11.025 = -0.245*rf -0.98*rM

-0.725 = - 0.225*rf

risk free rate = 3.22%

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