the expected return on bevo stock is 12.6 percent. if the expected return on the market is 10 percent and the beta for bevo is 1.4, then what is the risk-free rate?

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21-10-2022
Business

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the expected return on bevo stock is 12.6 percent. if the expected return on the market is 10 percent and the beta for bevo is 1.4, then what is the risk-free rate?

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SidHussain SidHussain · Answer 1 · 2022-10-24T13:18:17-04:00

The risk-free rate is calculated to be 3.5% if the expected return on Bevo stock is 12.6 percent.

The risk-free rate can be described as the theoretical rate of return on investment with zero risk.

If the expected return on Bevo stock is 12.6% and the expected return on the market is 10%, then the risk-free rate can be calculated as follows;

ER on Bevo stock = Rf + 1.4(ER on market - Rf)

Here ER represents expected return and Rf represents the risk-free rate

Substituting the values;

0.126 = Rf + 1.4(0.1 - Rf)

0.126 = Rf + 0.14 - 1.4Rf

0.126 - 0.14 = Rf - 1.4Rf

Finding the common denominator;

5(Rf)/5 - 7Rf/5 = 0.126 - 0.14

5Rf - 7Rf / 5 = 0.126 - 0.14

-2Rf / 5 = -0.014

-2Rf = 5(-0.014)

-2Rf = -0.07

Rf = (-0.07) ÷ (-2) = 0.035

Converting it into percentage as follows;

Rf = 0.035 × 100 = 3.5%

Hence, the risk-free rate is determined to be 3.5%

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