Stock Y has a beta of .79 and an expected return of 7.93%. Stock Z has a beta of 1.31 and an expected return of 12.3%. What is the risk-free rate of return assuming that both Stock X and Stock Y are correctly priced?
A)1.20%
B)1.29%
C)1.43%
D)2.83%
E)3.30%

Question

Quizplus · Accepted Answer

The risk-free rate can be found using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Since we have two stocks, we can set up two equations and solve for the risk-free rate (Rf) and market return (Rm).For Stock Y: 7.93% = Rf + 0.79 * (Rm - Rf)For Stock Z: 12.3% = Rf + 1.31 * (Rm - Rf)Solving these equations simultaneously for Rf gives us a risk-free rate of approximately 1.29%.

Stock Y Has a Beta of