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 |
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13.00 |
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11.00 |
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5.00 |
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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