A stock has an expected return of 115 percent its beta is 16

A stock has an expected return of 11.5 percent, its beta is 1.65, and the expected return on the market is 9.2 percent. What must the risk-free rate be?

Solution

Using CAPM model,

Expected Return = Risk free rate + Beta ( expected return on market - Risk free rate)

0.115 = Risk free rate + 1.65 (0. 092 - Risk free rate)

0.115 = Risk free rate - 1.65 risk free rate + 0.1518

0.65 Risk free rate = 0.0368

Risk free rate = 0.0566 = 5.66%