The beta coefficient of Zed Corporation is equal to 0.7 and the required rate of return on the stock equals 12 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of return? (Round off the answer to two decimal places.)
A) 11.56%
B) 10.83%
C) 9.52%
D) 12.25%
E) 8.89%

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) can be used to solve for the risk-free rate of return in this scenario:

Required rate of return = Risk-free rate of return + Beta * (Expected return on the market - Risk-free rate of return)

12% = RF + 0.7*(12.5% - RF)

Solving for RF, we get:

RF = 10.83%

Therefore, the best choice is B.

The Beta Coefficient of Zed Corporation Is Equal to 0