Question

Question 25
A stock has a beta of 1.5 and an expected return of 16.35%. What is the risk-free rate if the market rate of return is 12.5%?
96

Answer 1

Answer:

4.8%

Step-by-step explanation:

Given that :

Stock beta (B) = 1.5

Expected return = 16.35% = 0.1635

Maeket rate of return (Rm) = 12.5% = 0.125

Risk-free rate of return (Rf) =?

Using the relation :

Expected rate of return = risk free rate + Beta(market rate - Risk-free rate)

Expected rate of return = Rf + B(Rm - Rf)

Plugging our values :

0.1635 = Rf + 1.5(0.125 - Rf)

Open the bracket

0.1635 = Rf + 0.1875 - 1.5Rf

Collect like terms

0.1635 - 0.1875 = Rf - 1.5Rf

−0.024 = - 0.5Rf

Divide both sides by - 0.5

0.024 / 0.5 = Rf

Rf = 0.048

Rf = 0.048 * 100% = 4.8%