The correct answer is A (0.80). According to the CAPM, the expected return of an asset is calculated as:

$E(R_i) = R_f + \beta_i (E(R_m) - R_f)$

Where:

• $E(R_i)$ is the expected return of the asset (5%).
• $R_f$ is the risk-free rate (1%).
• $E(R_m) - R_f$ is the market risk premium (5%).
• $\beta_i$ is the asset's beta.

Rearranging the formula to solve for $\beta_i$:

$\beta_i = \frac{E(R_i) - R_f}{E(R_m) - R_f} = \frac{5\% - 1\%}{5\%} = \frac{4\%}{5\%} = 0.80$

Option B (1.00) is incorrect because it omits subtracting the risk-free rate in the numerator, leading to $\beta_i = \frac{5\%}{5\%} = 1.00$.

Option C (1.25) is incorrect because it inverts the formula, resulting in $\beta_i = \frac{5\%}{4\%} = 1.25$. This error arises from misapplying the CAPM formula.