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Dima020 [189]
3 years ago
11

A stock has an expected return of 13.5 percent, its beta is 1.40, and the expected return on the market is 11.5 percent. What mu

st 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.)
Business
1 answer:
uranmaximum [27]3 years ago
6 0

Answer:

The risk free rate is 6.50%

Explanation:

The required rate of return is the minimum return that investors demand/expect on a stock based on the systematic risk of the stock as given by the beta. The expected or required rate of return on a stock can be calculated using the CAPM equation.

The equation is,

r = rRF + Beta * (rM - rRF)

Where,

  • rRF is the risk free rate
  • rM is the return on market

As we know the figures for r, Beta and rM, we will input these figures in the equation to calculate risk free rate.

Let risk free rate be x.

0.135 = x + 1.4 * (0.115 - x)

0.135 = x + 0.161 - 1.4x

0.135 - 0.161  =  x - 1.4x

-0.026  =  -0.4x

-0.026 / -0.4 = x

x =  0.065 or 6.50%

r = 0.1475 or 14.75%

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