Question 2 (of 8) Save & Exit | | Submit value: 1.50 points Problem 11-16 Using

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Question 2 (of 8) Save & Exit | | Submit value: 1.50 points Problem 11-16 Using CAPM [LO 4] A stock has an expected return of 13.5 percent and a beta of 1.16, and the expected return on the market is 12.5 percent. What must the risk-free rate be? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate eBook & Resources Worksheet Difficuity: 1 Basic Section: 11.7 The Security Market Line Problem 11-16 Using CAPM [LO 4] Leaning Objective: 11-04 Discuss the security market line and the risk-return trade- off

Explanation / Answer

Using Capital Assets Price Model Expected Return 13.50% Beta 1.16 Expected return on the market 12.50% Formula= Expected Return=Risk Free Rate+Beta*(Expected retun on a market-Risk free rate) 13.5%=RFR+1.16*(12.5%-RFR) 13.5%=RFR+.145-1.16RFR 1.16RFR-RFR=14.5%-13.5% .16 RFR=1% RFR=1%/.16 RFR=6.25%

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