Answer :
The risk-free rate of return on Hilo stock is 1.58%
Expected return on the stock=risk free rate beta x (expected market return-risk free rate)
14.08%=risk free rate+1.26 x (11.5%-risk free rate)
14.08%=risk free rate+14.49%-1.26 x risk free rate
0.41=0.26 x risk-free rate
risk-free rate= [tex]\frac{0.41}{0.26}[/tex]%=1.58%
The hazard-free price is the price of going back offered by means of funding that carries 0 risks. each investment asset incorporates a few degrees of threat, however small, so the risk-free price is something of a theoretical concept. In practice, it is taken into consideration to be the hobby price paid on short-time period government debt. the risk-free rate threat-unfastened price of going back no longer genuinely exists, as each investment carries at least a small quantity of hazard.
To calculate the actual chance-unfastened charge, subtract the inflation rate from the yield of the Treasury bond matching your funding duration. Crucial banks control the threat-loose fee – nicely understood as the yield on short-term authorities’ payments. that is a risk-free rate fact of financial life but not one that we frequently think about. The capital asset pricing model and present-day portfolio idea take the danger-loose price as “given” instead of as “determined”.
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