Answer to Question #121459 in Financial Math for Ahmad

Question

Assume that the required rate of return on a stock is 15.6% and the expected return on the market is 14%. What is the risk-free rate if the stock has a beta of 1.2? *

Answer 1

E(r_i ) = r_f + β₁ [ E (r_m ) - r_f )

15.6 = r_f + 1.2 (0.14 - r_f )

0.2 = r_f + 0.168 - 1.2 r_f

0.2 r_f = -0.032

r_f = -0.16

_{rf =}