Question

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%

Answer 1

Answer:

4.8%

Explanation:

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

16.35% = r + 1.5(12.5 - r)

16.35% = r + 18.75 - 1.5r

2.4 =0.5r

r = 4.8%