A stock has an expected return of 12.4 percent, a beta of 1.30, and the expected

Question

A stock has an expected return of 12.4 percent, a beta of 1.30, and the expected return on the market is 11.30 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

A stock has an expected return of 12.4 percent, a beta of 1.30, and the expected return on the market is 11.30 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Expected return = Risk-free return (RFR) + Beta x (Expected market return - RFR)

0.124 = RFR + 1.3 x (0.113 - RFR)

0.124 = RFR + 0.1469 - 1.3RFR

- 0.0229 = - 0.3RFR

RFR = - 0.0229 / - 0.3 = 0.0763, or 7.63%

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