Answer: 14%

## Explanation The Capital Asset Pricing Model (CAPM) formula is: **Expected Return = Risk-free rate + Beta × Market Risk Premium** Given: - Risk-free rate (Rf) = 2% - Market risk premium (Rm - Rf) = 8% - Beta (β) = 1.5 **Calculation:** Expected Return = 2% + 1.5 × 8% Expected Return = 2% + 12% Expected Return = 14% **Important Note:** The security's correlation with the market (0.5) is not needed in the CAPM calculation. Beta already incorporates the correlation and relative volatility information. Beta is calculated as: β = (Correlation × Security's Standard Deviation) / Market's Standard Deviation Since beta is already given as 1.5, we don't need the correlation value to compute the expected return using CAPM. Therefore, the security's expected rate of return is 14%, which corresponds to option C.

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