A stock has a beta of 1.5 and an expected return of 16.35%. What is the risk-free rate if the market rate of return is 12.5%?

Risk free-rate (Rf)

As per CAPM Approach, the Expected rate of return = Risk-free rate + Beta(Market rate – Risk free rate)

Expected rate of return = Rf + B(Rm – Rf)

16.35 = Rf + 1.50(12.50 - Rf)

16.35 = Rf + 18.75 - 1.50Rf

16.35 = 0.50Rf - 18.75

0.50Rf = 2.40

Rf = 2.40 / 0.50

Rf = 4.80

Therefore, the Risk-free rate = 4.80%