Explanation:
The correct answer is B.
According to CAPM, the expected return on an asset is given by:
Where is the difference between the expected market return and the risk-free rate (market risk premium) and is the beta for the stock.
Thus,
Note that, what we are given in the question is the expected market risk premium and it should not be confused with the expected market return.
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Q.192 You have been provided with the following information regarding the stock of Translink, an international air transport company:
Use the capital asset pricing model to determine the expected return of Translink.
A
7.5%
B
10.5%
C
6%
D
8%
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