Stock J has a beta of 1.52 and an expected return of 15.76percent.Stock K has a beta of .98 and an expected return of 11.44 percent.What is the risk-free rate if these securities both plot on the security market line?
A)3.60 percent
B)3.34 percent
C)3.57 percent
D)3.52 percent
E)3.64 percent

Question

Quizplus · Accepted Answer

The correct answer is A because the risk-free rate is 3.60 percent. This can be calculated using the following formula:Risk-free rate = Expected return on stock J - Beta of stock J * (Expected return on stock K - Risk-free rate)Plugging in the given values, we get:Risk-free rate = 15.76% - 1.52 * (11.44% - Risk-free rate)Solving for the risk-free rate, we get:Risk-free rate = 3.60%

Stock J Has a Beta of 1