Answer: 11%

## Explanation According to the Capital Asset Pricing Model (CAPM): **Expected return of stock = Risk-free rate + Beta × (Market return - Risk-free rate)** Given: - Risk-free rate (10-year US Treasury) = 5% - Market return (S&P 500) = 10% - Beta of Orange Inc. = 1.2 **Calculation:** E[r] = 5% + 1.2 × (10% - 5%) E[r] = 5% + 1.2 × 5% E[r] = 5% + 6% E[r] = 11% **Key Points:** - The 10-year US Treasury bonds are considered the risk-free rate - The S&P 500 return represents the market return - Beta of 1.2 means the stock is 20% more volatile than the market - The expected return of 11% compensates for both the time value of money (risk-free rate) and the additional risk premium for the stock's volatility

Author: Tanishq Prabhu