A stock has an expected return of 15.0 percent, a beta of 1.70, and the expected
ID: 2737464 • Letter: A
Question
A stock has an expected return of 15.0 percent, a beta of 1.70, and the expected return on the market is 9.90 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 15.0 percent, a beta of 1.70, and the expected return on the market is 9.90 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
The expected return on the stock = Re = 15.0% =0.15
beta = 1.70
Return on markey = Rm = 9.9% = 0.099
According to CAPM, Re = Rf +beta*(Rm-Rf)
0.15 = Rf +1.7(0.099-Rf)
0.15 = Rf + 0.1683 - 1.7Rf
0.0183 = 0.7Rf
Rf = 0.0183/0.7
Rf = Risk free rate = 0.02614 =2.61%
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