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The common stock of B&B Beauty has an expected return of 13
The common stock of B&B Beauty has an expected return of 13.6 percent and a beta of 1.4. The expected return on the market is 11.2 percent. What is the risk-free rate?
Expert Solution
Sol:
Expected return = 13.6%
Beta = 1.4
Market return = 11.2%
To compute risk free rate
Expected return = Risk free return + beta * (Market return - Risk free return)
13.6% = Risk free return + 1.4 * (11.2% - Risk free return)
13.6% = Risk free return + 1.4 * 11.2% - Risk free return * 1.4
13.6% = Risk free return + 15.68%- 1.4 Risk free return
13.6% - 15.68% = Risk free return - 1.4 Risk free return
-2.08 = -0.4 Risk free return
Risk free return = 2.08 / 0.4
Risk free return = 5.2%
Therefore risk free rate will be 5.2%
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