Answer:
6%
Explanation:
Given that,
Assume both portfolios A and B are well diversified,
E(rA) = 15.0%
E(rB) = 16.8%
βA = 1
βB = 1.2
Therefore, the risk-free rate is calculated as follows:
[tex]\frac{E(rA)-rf}{\beta A} =\frac{E(rB)-rf}{\beta B }[/tex]
[tex]\frac{0.15-rf}{1} =\frac{0.168-rf}{1.2}[/tex]
1.2 × (0.15 - rf) = 1 × (0.168 - rf)
0.18 - 1.2rf = 0.168 - rf
0.18 - 0.168 = 1.2rf - rf
0.012 = 0.2rf
0.06 or 6% = rf
Hence, the risk-free rate is 6 percent.
