The risk-free rate is 4.2%, and the expected return on the market is 10%. A publicly-traded bond promises to return 8%. The expected return on the bond investment is 5.5%. What is the
Bond's implied beta?
A)0.22
B)1.38
C)0.73
D)0.45

Question

Quizplus · Accepted Answer

The bond's implied beta can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for Beta gives: Beta = (Expected Return - Risk-Free Rate) / (Market Return - Risk-Free Rate). Plugging in the given values: Beta = (5.5% - 4.2%) / (10% - 4.2%) = 1.3% / 5.8% = 0.22.

The Risk-Free Rate Is 4