Answer: 2.5556

## Explanation This question uses the Capital Asset Pricing Model (CAPM) formula: $$E(R_i) = R_f + \beta_i(E(R_m) - R_f)$$ Where: - $E(R_i)$ = Expected return of the stock = 15% - $R_f$ = Risk-free rate = 3.5% - $E(R_m)$ = Expected market return = 8% - $\beta_i$ = Stock beta (what we're solving for) **Step-by-step calculation:** 1. Plug in the known values: $$15\% = 3.5\% + \beta_i(8\% - 3.5\%)$$ 2. Calculate the market risk premium: $$8\% - 3.5\% = 4.5\%$$ 3. Rewrite the equation: $$15\% = 3.5\% + 4.5\%\beta_i$$ 4. Subtract the risk-free rate from both sides: $$15\% - 3.5\% = 4.5\%\beta_i$$ $$11.5\% = 4.5\%\beta_i$$ 5. Solve for beta: $$\beta_i = \frac{11.5\%}{4.5\%} = 2.5556$$ **Interpretation:** A beta of 2.5556 means that Company ABC's stock is highly volatile compared to the overall market. For every 1% change in the market return, ABC's stock is expected to change by approximately 2.56%. This high beta is consistent with the stock's high expected return of 15%, as higher risk should be compensated with higher expected returns according to CAPM.

Author: Tanishq Prabhu