Question

In: Finance

Stock J has a beta of 1.47 and an expected return of 15.8 percent.

Stock J has a beta of 1.47 and an expected return of 15.8 percent. Stock K has a beta of 1.05 and an expected return of 11.9 percent. What is the risk-free rate if these securities both plot on the security market line?

Group of answer choices

2.15 percent

4.41 percent

3.88 percent

3.34 percent

4.68 percent

Expert Solution

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

J:

15.8=Rf+1.47*(Rm-Rf)

15.8=Rf+1.47Rm-1.47Rf

15.8=1.47Rm-0.47Rf

Rm=(15.8+0.47Rf)/1.47

K:

11.9=Rf+1.05*(Rm-Rf)

11.9=Rf+1.05Rm-1.05Rf

11.9=1.05Rm-0.05Rf

11.9=1.05(15.8+0.47Rf)/1.47-0.05Rf

11.9=11.2857143+0.335714286Rf-0.05Rf

Rf=(11.9-11.2857143)/(0.335714286-0.05)

=2.15%=risk free rate

jeff jeffy answered 2 years ago

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