Answer:
E 0.95 11.88%
Explanation:
First we have to calculate the market return from market risk premium using the following formula:
Market risk premium=Market return-Risk free return
Market return=3.9%+8.4%=12.3%
Above market return will be applied to the Capital asset pricing model formula for the purpose of calculating expected return.
CAPM=Risk free return+Beta(Market return-Risk free return)
A.
Expected return=3.9%+0.77(12.3%-3.9%)=10.37%
Incorrect because the expected return is 10.37% as compared to the 7.86% given in question.
B.
Expected return=3.9%+1.55(12.3%-3.9%)=16.92%
Incorrect because the expected return is 16.92% as compared to the 12.65% given in question.
C.
Expected return=3.9%+1.36(12.3%-3.9%)=15.32%
Incorrect because the expected return is 15.32% as compared to the 17.33% given in question.
D.
Expected return=3.9%+1.33(12.3%-3.9%)=15.072%
Incorrect because the expected return is 15.072% as compared to the 11.93% given in question.
E.
CAPM=3.9%+0.95(12.3%-3.9%)=11.88%
Correct because the expected return is 11.88% as given in question.
So the correct option is E.
