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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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