Both assets A and B plot on the SML. Asset A has an expected return of 15% and a beta of 1.7. Asset B has an expected return of 12% and a beta of 1.1. What is the risk-free rate of return?
A) 5.0%
B) 6.5%
C) 11.5%
D) It cannot be determined from this information.
Answer: B
Explanation: B) slope = = = = 5%. E(ra) = rf + (βa) × (E(rm) - rf)
(E(rm) - rf) = 5% from above; therefore, rf = E(ra) - βa(5%) = 15% - 1.7 × (5%) = 6.50%.
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