A stock has an expected return of 13 percent its beta is 14

A stock has an expected return of 13 percent, its beta is 1.4, and the expected return on the market is 10 percent. What must the risk-free rate be? (Do not round your intermediate calculations.) 0 2.50% 0-100% ? 2.60% 2.37% 0 2.62%

Solution

Correct answer is option A.2.5%

We know that under CAPM,

Expected return = Risk free rate + Beta ( Market return - Risk free rate)

13=Rf +1.4(10-rf)

Risk free rate =2.5%

13=Rf + 14 -1.4 Rf