Answer:
Risk-free rate of return= 5.13%
Explanation:
<em>The capital asset pricing model is a risk-based model. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is </em><em>measured by beta.</em>
Under CAPM, E(r)= Rf + β(Rm-Rf)
Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market., E(r)- Return on equity
This model can be used to work-out the risk-free rate as follows:
E(r) = Rf + β (Rm-Rf)
Rf- ?, β= 1.63, Rm- 11.97, E(r)- 16.28
16.28 = Rf + 1.63× (11.97 - Rf)
16.28 = Rf + 19.5111 - 1.63Rf
collect lie terms
1.63Rf - Rf = = 19.5111- 16.28
0.63Rf = 3.2311
Divide both sides by 0.63
Rf = 3.2311
/0.63
RF = 5.128
Rf= 5.13%
Risk-free rate of return= 5.13%
