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Answer:
<u>13.2%</u>
Explanation:
As per Capital Asset Pricing Model (CAPM),
Expected Rate Of Return =
wherein, = Risk free rate of return on treasury bonds
B= Beta , which represents the degree of sensitivity of security return to the market return.
= Return on market portfolio
Thus, Expected rate of return of security X = 6 + 1.2(12 - 6)
= 13.2%
CAPM model is used for calculating expected rate of return. As per the model, the investors expect a risk premium represented by excess of rate of return of market portfolio over risk free rate , in addition for the risk free rate of return.
The risk premium serves as a compensation for investing in risky securities instead of risk free securities.