stock y has a beta of 1.40 and an expected return of 13.0 percent. stock z has a beta of .85 and an expected return of 10.4 percent. what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

Owners of stocks receive a stake in a company as a type of security. Stocks are also referred to as "equities." Stocks represent ownership in a publicly traded firm. You become a shareholder when you purchase a company's shares. All of the shares used to divide ownership of a firm or company are referred to as stock in the financial sector. Based on the total number of shares, each share of stock represents a small portion of the company's ownership.

Is a stock an asset?

According to GICS, which refers for the Global Industry Classification Standard, there are 11 different stock market sectors. Health, materials, real estate, consumer discretionary, utilities, power, industrial companies, consumer services, financials, or technology are some of these industries.

Briefing:

The following is a relationship between the two stocks:

Stock Y

Beta = 1.40

Expected return = 13.0%

Risk free rate = rf

According to CAPM model:

Expected return = rf + risk premium × beta

13.0% = rf + risk premium × 1.40

Stock Z

Beta = 0.85

Expected return = 10.4%

Risk free rate = rf

According to CAPM model:

Expected return = rf + risk premium × beta

10.4% = rf + risk premium × 0.85

Solving equation 1 and 2

10.4% × 1.40 – 13.0% × 0.85 = 1.40rf – 0.85rf

14.56% - 11.05% = 0.55rf

Rf = 5.53%

Hence, Risk free rate is 5.53%.

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