Stock Y has a beta of 1.27 and an expected return of 13.30 percent. Stock Z has

Question

Stock Y has a beta of 1.27 and an expected return of 13.30 percent. Stock Z has a beta of .60 and an expected return of 8.00 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Stock Y has a beta of 1.27 and an expected return of 13.30 percent. Stock Z has a beta of .60 and an expected return of 8.00 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

For this , first set risk-reward ratio equal to each other for both stocks

(13.30%-Rf)/1.27=(8.00%-Rf)/0.60

(13.30%-Rf)/(8.00%-Rf)=1.27/0.60

(13.30%-Rf)/(8.00%-Rf)=2.1167

13.30%-rf=16.9333%-2.1167Rf

1.1167Rf=3.6333%

Rf=3.25% is risk free rate required

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