Explanation

According to the Capital Asset Pricing Model (CAPM), the expected return on an asset is given by:

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

Where:

• $R_f$ = Risk-free rate = 3%
• $(E(R_m) - R_f)$ = Expected market risk premium = 5%
• $\beta_i$ = Beta for the stock = 1.5

Substituting the values:

$E(R_i) = 3\% + 5\% \times 1.5$ $E(R_i) = 3\% + 7.5\%$ $E(R_i) = 10.5\%$

Key Points:

• The expected market risk premium $(E(R_m) - R_f)$ is already given as 5%, so we don't need to calculate it separately
• The beta of 1.5 indicates the stock is 50% more volatile than the market
• The calculation shows Translink's expected return is 10.5% to compensate for its systematic risk