A risky asset has a beta of 1.64 and the expected return of 18.8%. What is the risk-free rate if the reward-to-risk ratio is 7%?
A) 7.50%
B) 7.32%
C) 5.73%
D) 6.94%
E) 7.09%

Question

Quizplus · Accepted Answer

The reward-to-risk ratio is given by (Expected Return - Risk-Free Rate) / Beta. Rearranging this formula to solve for the Risk-Free Rate gives us Risk-Free Rate = Expected Return - (Beta * Reward-to-Risk Ratio). Plugging in the given values: Risk-Free Rate = 18.8% - (1.64 * 7%) = 18.8% - 11.48% = 7.32%.

A Risky Asset Has a Beta of 1