Determine the risk free rate if a company's rate of return is 9%, its Beta is 1.8 and the expected return on the stock market is 10%.
A)11.25%
B)12.25%
C)13.25%
D)14.25%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM), the formula for the expected return on a stock is:
Expected Return = Risk-Free Rate + Beta * (Expected Return on the Market - Risk-Free Rate)
Rearranging the formula and plugging in the given values:
Risk-Free Rate = (Expected Return - Beta * Expected Return on the Market) / (1 - Beta)
Risk-Free Rate = (0.09 - 1.8 * 0.1) / (1 - 1.8)
Risk-Free Rate = 0.1125 or 11.25%
Therefore, the answer is choice A.

Determine the Risk Free Rate If a Company's Rate of Return