Answer: 0.80

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.

Author: LeetQuiz Editorial Team