A stock has an expected return of 15.1 percent, a beta of 1.60, and the expected

Question

A stock has an expected return of 15.1 percent, a beta of 1.60, and the expected return on the market is 11.40 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 15.1 percent, a beta of 1.60, and the expected return on the market is 11.40 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

Answer:

To calculate risk free rate we should use CAPM method, which is as follows

Expected rate of retun of stock = Risk free rate + (Market rate of retun - risk free rate)Beta

Suppose risk free rate = X

15.1 = X + (11.40 - X) 1.60

15.1 = X + 18.24 - 1.60X

15.1 - 18.24 = 0.60X

3.14 = 0.60X

3.14/0.60 = X

5.23% = X = Risk free rate

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