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Answer: 10.5%
## 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
Author: Tanishq Prabhu
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You have been provided with the following information regarding the stock of Translink, an international air transport company:
Use the capital asset pricing model to determine the expected return of Translink.
A
7.5%
B
10.5%
C
6%
D
8%
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