MSN.com- Hotmail OutlookX Exam #5 (Chapters 9 & 11) 90% :\'Qsearch Most Visited

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MSN.com- Hotmail OutlookX Exam #5 (Chapters 9 & 11) 90% :'Qsearch Most Visited Getting Started My USC Aiken - Black he True Story of Poca.. connect. BADM 363 Business Finance 12017 (ALL FINANCE Exam #5 (Chapters 9 & nstructions help Quesion 7 (ot 40) Save & Ext Suomt me remaining 357 04 Stock Y has a beta of 1.30 and an expectod return of 16 5 percent Stock Z has s beta of 75 and an expected return of 12 7 percent What would the risk tree rate have to be for the two stocks to be correctly priced relative to each cther? (Do not round intermediate calculations and enter your answer as a percent Risk-free rate

Explanation / Answer

Solution:

We need to set the reward to risk ratios of the two assets equal to each other which is

(0.165 - rf)/1.30 = (0.127 - rf)/0.75

We can crossmultiply to get

0.75 (0.165 - rf) = 1.30 (0.127 - rf)

Solving for the risk-free rate, we find

0.12375 - 0.75rf = 0.1651 - 1.30rf

0.55rf = 0.04135

rf = 0.075182 or 7.52%

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