Both assets A and B plot on the SML. Asset A has an expected return of

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

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%.