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Answer: 7.5%
## Explanation According to the Capital Asset Pricing Model (CAPM): \[ E(R_i) = R_f + (E(R_m) - R_f) \times \beta_i \] Where: - \( E(R_i) \) = Expected return on asset i = 7% - \( R_f \) = Risk-free rate = 5% - \( E(R_m) \) = Expected market return (what we're solving for) - \( \beta_i \) = Beta of asset i = 0.8 Substituting the given values: \[ 7\% = 5\% + (E(R_m) - 5\%) \times 0.8 \] Solving step by step: 1. \[ 7\% - 5\% = (E(R_m) - 5\%) \times 0.8 \] 2. \[ 2\% = (E(R_m) - 5\%) \times 0.8 \] 3. \[ \frac{2\%}{0.8} = E(R_m) - 5\% \] 4. \[ 2.5\% = E(R_m) - 5\% \] 5. \[ E(R_m) = 2.5\% + 5\% = 7.5\% \] Therefore, the expected market return is **7.5%**.
Author: Tanishq Prabhu
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Q.193 John Powel gathers the following information regarding the stock of Swisscom, an internet service provider:
Use this information to determine the expected market return.
A
8%
B
12%
C
7.5%
D
5%
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