The correct answer is B (0.5). The correlation between the security's returns and the market's returns is calculated using the formula:

$\rho_{im} = \beta_i \times \frac{\sigma_m}{\sigma_i}$

Where:

• $\rho_{im}$ is the correlation coefficient.
• $\beta_i$ is the security's beta (0.35).
• $\sigma_m$ is the standard deviation of the market returns (18%).
• $\sigma_i$ is the standard deviation of the security's returns (12%).

Substituting the given values:

$\rho_{im} = 0.35 \times \frac{0.18}{0.12} = 0.525 \approx 0.5$

Option A (0.2) is incorrect because it uses an incorrect formula or confuses standard deviations with variances. Option C (0) is incorrect as it misapplies the formula by using variances instead of standard deviations.