Stock A has an expected return of 14.4 percent and a beta of 1.21.Stock B has an expected return of 12.87 percent and a beta of 1.06.Both stocks have the same reward-to-risk ratio.What is the risk-free rate?
A)2.06 percent
B)2.28 percent
C)1.79 percent
D)3.35 percent
E)1.92 percent

Question

Quizplus · Accepted Answer

The risk-free rate is the expected return on a risk-free investment, such as a Treasury bill. The reward-to-risk ratio is the ratio of the expected return on a stock to its beta. Since both stocks have the same reward-to-risk ratio, we can set the ratio of their expected returns equal to the ratio of their betas:14.4% / 1.21 = 12.87% / 1.06Solving for the risk-free rate, we get:risk-free rate = 14.4% - 1.21 * 12.87% = 2.06%

Stock a Has an Expected Return of 14