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      Question

      If the expected return on the market is 18% and the

      expected return on a stock with a beta of 1.2 is 20%, what is the risk-free rate?
      A 2% Correct Answer Incorrect Answer
      B 6% Correct Answer Incorrect Answer
      C 8% Correct Answer Incorrect Answer
      D 10% Correct Answer Incorrect Answer
      E 12% Correct Answer Incorrect Answer

      Solution

      Expected return of stock = risk free rate + beta (market return – risk free rate) 20% = x + 1.2 (18%-x) X = 8% which is the risk free rate.

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