Explanation

Using 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 on security = 7%
• $R_f$ = Risk-free rate = 4%
• $E(R_m)$ = Expected return on market = 14%
• $\beta_i$ = Beta of the security (what we need to find)

Rearranging the formula to solve for beta:

$\beta_i = \frac{E(R_i) - R_f}{E(R_m) - R_f}$

Plugging in the values:

$\beta_i = \frac{7\% - 4\%}{14\% - 4\%} = \frac{3\%}{10\%} = 0.30$

Therefore, the security's beta is 0.30, which corresponds to option B.

Verification:

• Expected return = Risk-free rate + Beta × Market risk premium
• 4% + 0.30 × (14% - 4%) = 4% + 0.30 × 10% = 4% + 3% = 7% ✓