Stock A has an expected return of 15.6 percent and a beta of 1.27. Stock B has an expected return of 11.4 percent and a beta of 0.89. Both stocks have the same reward-to-risk ratio. What is the risk-free rate

Respuesta :

Answer:

The risk free rate is 1.5632%

Explanation:

The expected return of stock is calculated with the formula

[tex]Return=Riskfree + Beta * Premium market risk[/tex]

So, for A and B, the calculation is

  • A --> [tex]0.156 = X + 1.27*Y[/tex]
  • B --> [tex]0.114 = X + 0.89*Y[/tex]

If we clear X in the first equation and we replace that in the second, we get:

  • [tex]X = 0.156 - 1.27*Y ---> 0.114 = 0.156 - 1.27*Y+0.89*Y[/tex]
  • [tex]0.042 = 0.38*Y ---> Y = \frac{0.042}{0.38} = 0.110526316[/tex]
  • [tex]X = 0.156 - 1.27 * 0.110526316 = 0.015632 = 1.5632%[/tex]
ACCESS MORE
EDU ACCESS