Answer:
Expected market return on a security is 9.92 %.
Explanation:
The Capital Asset Pricing Model (CAPM) is used to calculate the cost of equity for a firm as
Cost of Equity = Return on Risk Free Security + Beta × Risk Premium
Where,
Risk Premium = Return on Market Portfolio - Return on Risk Free Security
= Rm - 0.02.
Thus market return (Rm) can be determined as,
0.095 = 1.20 × (Rm - 0.02)
0.095 = 1.20 Rm - 0.024
1.20 Rm = 0.119
Rm = 0.0992 or 9.92 %
