Question

The expected return on Bevo stock is 13.8 percent. If the expected return on the market...

The expected return on Bevo stock is 13.8 percent. If the expected return on the market is 11 percent and the beta for Bevo is 1.5, then what is the risk-free rate?

A) 4.80% B) 5.40% C) 6.70% D) 7.50%

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Homework Answers

Answer #1

Let X be Risk Free Return

Expected Return =

13.8% = X + 1.5 (11% - X)

13.8% = X + 16.5%  - 1.5 X

13.8% = 16.5%  - 0.5 X

X = (16.5% - 13.8%) / 0.5

X = 5.4%

Option B is correct.

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