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Consider the CAPM. The expected return on the market is 10%. The expected return on a...

Consider the CAPM. The expected return on the market is 10%. The expected return on a stock with a beta of 0.7 is 8%. What is the risk-free rate?

7.00

13.00

11.00

5.00
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Answer #1

Required return as per CAPM = Risk-Free rate + Beta ( Market Return - Risk-Free Rate)

8% = Risk Free Rate + 0.7 (10% - Risk Free Rate)

8% = Risk Free Rate + 7% - 0.7*Risk Free Rate

8% - 7% = Risk Free Rate - 0.7 * Risk Free Rate

1% = 0.3 * Risk Free Rate

Risk Free Rtae = 1% / 0.3

Risk Free Rate = 3.3333%

All the options given are wrong, kindly check with the provider. The correct Risk-Free Rate is 3.3333%.

If you substitute the options(7%, 13%, 11%, 5%) provided in the CAPM equation and try to find the Required Return, you will not get 8% which is provided as the Required Return. So the correct option should be 3.3333%


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