Problem 11-16 Using CAPM [LO 4] A stock has an expected return of 12.4 percent a
ID: 2715107 • Letter: P
Question
Problem 11-16 Using CAPM [LO 4]A stock has an expected return of 12.4 percent and a beta of 1.15, and the expected return on the market is 11.4 percent.
Required: What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Problem 11-16 Using CAPM [LO 4]
A stock has an expected return of 12.4 percent and a beta of 1.15, and the expected return on the market is 11.4 percent.
Required: What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Problem 11-16 Using CAPM [LO 4]
A stock has an expected return of 12.4 percent and a beta of 1.15, and the expected return on the market is 11.4 percent.
Required: What must the risk-free rate be? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Expected Return = Risk free rate + Beta (Expected return on market – Risk free rate)
Let risk free rate be X
0.124 = X + 1.15(0.114 – X)
0.124 = X – 1.15X + 0.1311
0.15 X = 0.0071
X = 0.0473 = 4.73%