Stock Y has a beta of 1.0 and an expected return of 12.4 percent. Stock Z has a beta of 6

Advanced Placement (AP)

1 answer:

kotegsom [21]3 years ago

5 0

Answer: Risk free rate = 1.9%

Explanation:

The Capital Asset Pricing Model allows for the calculation of the required return using the market return, beta and risk free rate.

Required return = Risk free rate + Beta * ( Market return - Risk free rate)

First find the market rate. Stock Y is uniquely positioned to help with that:

12.4% = Risk free rate + 1.0 * (Market return - Risk free rate)

12.4% = rf + Market return - rf

Market return = 12.4%

Apply this to the formula using Stock Z:

8.2% = rf + 0.6 * (12.4% - rf)

8.2% = rf + 7.44% - 0.6rf

rf - 0.6rf = 8.2% - 7.44%

0.4rf = 0.76%

rf = 0.76% / 0.4

Risk free rate = 1.9%

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