Answer:
Risk-free rate of return= 5.13%
Explanation:
The capital asset pricing model is a risk-based model. Here, the return on equity is dependent on the level of reaction of the the equity to changes in the return on a market portfolio. These changes are captured as systematic risk. The magnitude by which a stock is affected by systematic risk is measured by beta.
Under CAPM, E(r)= Rf + β(Rm-Rf)
Rf-risk-free rate (treasury bill rate), β= Beta, Rm= Return on market., E(r)- Return on equity
This model can be used to work-out the risk-free rate as follows:
E(r) = Rf + β (Rm-Rf)
Rf- ?, β= 1.63, Rm- 11.97, E(r)- 16.28
16.28 = Rf + 1.63× (11.97 - Rf)
16.28 = Rf + 19.5111 - 1.63Rf
collect lie terms
1.63Rf - Rf = = 19.5111- 16.28
0.63Rf = 3.2311
Divide both sides by 0.63
Rf = 3.2311 /0.63
RF = 5.128
Rf= 5.13%
Risk-free rate of return= 5.13%
Based on the information given the risk-free rate of return is 5.13%.
Using this formula
E(r)= Rf + β(Rm-Rf)
Where:
Rf=Risk-free rate?
β= Beta=1.63
Rm= Return on market=11.67%
E(r)=Expected return on equity=16.28%
Let plug in the formula by solving for Rf
16.28 = Rf + 1.63× (11.97 - Rf)
16.28 = Rf + 19.5111 - 1.63Rf
Collect like terms
1.63Rf - Rf = 19.5111- 16.28
0.63Rf = 3.2311
Divide both sides by 0.63
Rf = 3.2311 /0.63
Rf = 5.128%
Rf= 5.13% (Approximately)
Inconclusion the risk-free rate of return is 5.13%.
Learn more about risk-free rate here:https://brainly.com/question/20115369
