A stock has an expected return of 15 percent, a beta of 1.70, and the expected r

Question

A stock has an expected return of 15 percent, a beta of 1.70, and the expected return on the market is 10.8 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.)

A stock has an expected return of 15 percent, a beta of 1.70, and the expected return on the market is 10.8 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.)

Explanation / Answer

Expected return = Risk-free rate + Beta(Expected return on the market - Risk-free rate)

0.15 = Risk-free rate + 1.70(0.108 - Risk-free rate)

0.15 = Risk-free rate + 0.1836 - 1.70Risk-free rate

0.70Risk-free rate = 0.0336

Risk-free rate = 0.048 or 4.80%

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