The expected return on Joseph's Restaurant's stock is 14.25% while the expected return on the market is 12.38%. The stock's beta is 1.18. What is the risk-free rate of return?
A) 1.99%
B) 2.04%
C) 2.48%
D) 3.23%
E) 3.68%

Question

Quizplus · Accepted Answer

Using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate), we can solve for the Risk-Free Rate. Plugging in the given values: 14.25% = Risk-Free Rate + 1.18 * (12.38% - Risk-Free Rate). Solving for the Risk-Free Rate gives approximately 1.99%.

The Expected Return on Joseph's Restaurant's Stock Is 14