The expected return on HiLo stock is 13.99% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?
A)2.8%
B)3.2%
C)3.7%
D)4.2%
E)4.5%

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) formula is:

E(Ri) = Rf + βi[E(Rm) - Rf]

where E(Ri) is the expected return on the stock i, Rf is the risk-free rate of return, βi is the stock's beta, and E(Rm) is the expected return on the market.

Substituting the given values, we have:

13.99% = Rf + 1.3(11.5% - Rf)

Solving for Rf, we get:

Rf = 3.2%

Therefore, the best choice is B (3.2%).

The Expected Return on HiLo Stock Is 13