Problem 12-13 Stock Y has a beta of 1.01 and an expected return of 8.38 percent.
ID: 2712006 • Letter: P
Question
Problem 12-13
Stock Y has a beta of 1.01 and an expected return of 8.38 percent. Stock Z has a beta of .70 and an expected return of 7 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Stock Y has a beta of 1.01 and an expected return of 8.38 percent. Stock Z has a beta of .70 and an expected return of 7 percent. What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)
Risk-free rate %Explanation / Answer
expected return = risk-free rate + beta * (market risk premium)
8.38 = risk free rate + 1.01*(market risk premium)
and
7 = risk free rate + .7*(market risk premium)
multiplying equation 1 by .7 and 2 by 1.01 and subracting eq1 from eq2
we get risk free rate = 3.88%