As of 11/20/2020, The Walt Disney Company (ticker: DIS) had a beta of 1

Finance Dec 03, 2020

As of 11/20/2020, The Walt Disney Company (ticker: DIS) had a beta of 1.11 and an expected return of 13.93%. If the expected market return is 12.61%, what is the risk-free rate?

answer choices:

-0.07%

0.61%

-2.85%

1.19%

Expert Solution

Calculation of Risk Free Rate (Rf) by using CAPM Model :

Ke = Rf + β( Rm - Rf )

Where,

Ke = Expected Return = 13.93% = 0.1393

β = Beta = 1.11

Rm = Market Return = 12.61% = 0.1261

13.93 = Rf + 1.11 ( 12.61 - Rf )

13.93 = Rf + 13.9971 - 1.11Rf

13.93 + 1.11Rf = Rf + 13.9971

1.11Rf = Rf + 13.9971-13.93

1.11Rf = Rf + 0.0671

1.11rf - Rf = 0.0671

0.11Rf = 0.0671

Rf = 0.0671/0.11

Rf = 0.61%

Risk Free Rate is 0.61%

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