Determine the riskfree rate for an asset given a required ra

Determine the risk-free rate for an asset, given a required rate of return of 18.99%, a beta of 1.35 and market return of 16%.

Solution

Required Return = 18.99%
Beta = 1.35
Market Return = 16%

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
18.99% = Risk-free Rate + 1.35 * (16% - Risk-free Rate)
0.1899 = Risk-free Rate + 0.216 - 1.35 * Risk-free Rate
0.35 * Risk-free Rate = 0.0261
Risk-free Rate = 0.0746
Risk-free Rate = 7.46%