A stock has an expected return of 12.8 percent and a beta of 1.19, and the expected return on the market is 11.8 percent. What m

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tester [92]

3 years ago

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A stock has an expected return of 12.8 percent and a beta of 1.19, and the expected return on the market is 11.8 percent. What m

ust the risk-free rate be?

Business

1 answer:

Stels [109] · Answer 1 · 2022-04-25T23:10:54+03:00

<span>We know from Capital asset pricing model that expected return (ER) of any stock can be calculated as ER = Rf + beta* ( Rm - Rf) where, Rf is risk free rate Rm is expected return on market. Therefore, 0.128 = Rf + 1.19* (0.118 - Rf) which is equivalent to 0.19 Rf = 0.140 - 0.128 Or, risk free rate, Rf = 0.0654 ~ 6.54%</span>