The expected return of the market is 12.90 percent. A stock has an expected return of 14.90 percent and a beta of 1.25. What is the risk-free rate?
A) 6.3%
B) 5.4%
C) 4.9%
D) 5.8%
E) 6.1%

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) is used to calculate the expected return of an asset based on its beta and the risk-free rate. The formula is:

Expected Return = Risk-free Rate + Beta*(Expected Market Return - Risk-free Rate)

Plugging in the given values:

14.90% = Rf + 1.25*(12.90% - Rf)

Solving for Rf:
Rf = 4.9%

Therefore, the best choice based on the given information is C) 4.9%.

The Expected Return of the Market Is 12