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Project A has a beta of 1.4 and an expected rate of rate of return of...

Project A has a beta of 1.4 and an expected rate of rate of return of 16.1%. Project B has a beta of 0.9 and an expected rate of return of 9.3%. What is the risk-free rate?

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Answer #1
Given -
Required rate Beta
A 16.10% 1.4
B 9.30% 0.9
we know that required rate = Risk free rate + market risk premium*Beta
Therefore we have
16.1%= Risk free rate + Risk premium *1.4
9.3%= Risk free rate + Risk premium *0.9
Substracting first equation and 2 we have
6.80% =0.5 risk premium
Risk premium = 13.600%
Therefore, risk free rate =
16.1%-13.6%*1.4
-2.94%
Ans = -2.94%
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