Question
6.Stock Y has a beta of 1.4 and an expected return of 13 percent. Stock Z has a beta of 0.85 and an expected return
6.Stock Y has a beta of 1.4 and an expected return of 13 percent. Stock Z has a beta of 0.85 and an expected return of 10.4 percent.
Required:What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Risk-free rate %
Suggestions:
We need to set the reward-to-risk ratios of the two assets equal to each other, which is:.......(equation needed)
We then cross multiply to get:
Solving for the risk-free rate, we find:
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