The expected return on JK stock is 1394 percent while the ex

The expected return on JK stock is 13.94 percent while the expected return on the market is 11.1 percent. The beta of JK stock is 1.4. What is the risk-free rate of return?

Solution

Calculate risk free return :

Expected rate of return = Risk free return+beta*(Rate of market-risk free return)

13.94 = X+1.4*(11.1-X)

13.94 = X+15.54-1.4X

0.4X = 1.6

X = 4%

SO risk free rate of return is 4%