A stock has an expected return of 15.5 percent, its beta is 1.65, and the expect

Question

A stock has an expected return of 15.5 percent, its beta is 1.65, and the expected return on the market is 12.6 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

A stock has an expected return of 15.5 percent, its beta is 1.65, and the expected return on the market is 12.6 percent. What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Computation of Risk free rate under CAPM method

Ke = Rf + beta (Rm - Rf)

15.5 = Rf + 1.65 ( 12.6 - Rf)

15.5 = Rf + 20.79 - 1.65Rf

15.5 = 20.79 - 0.65R f

15.5 - 20.79 = - 0.65 Rf

-5.29 / - 0.65 = Rf

Rf = 8.14.

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