A stock has an expected return of 15.10% and a beta of 1.30. What is the risk-free rate if the market rate is 13.1%?
A)6.43%
B)6.92%
C)7.01%
D)7.30%
E)7.90%

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is used to calculate the expected return of a stock: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging the formula to solve for the Risk-Free Rate gives: Risk-Free Rate = Expected Return - Beta * (Market Return - Risk-Free Rate). Plugging in the given values: 15.10% = Risk-Free Rate + 1.30 * (13.1% - Risk-Free Rate), solving for the Risk-Free Rate gives approximately 6.43%.

A Stock Has an Expected Return of 15