SIDC Module 12 Portfolio theory question: expected market return

Answer: B. 11.30%

CAPM: E(Ri) = Rf + βi[E(Rm) − Rf] = 3.5% + 1.3 × (9.5% − 3.5%) = 3.5% + 7.8% = 11.30%. Quoting 9.50% ignores beta and treats the share as if it carried market risk only. Multiplying beta by the whole market return (1.3 × 9.5% = 12.35%) forgets that beta scales only the risk premium. Adding the risk-free rate to that figure (3.5% + 12.35% = 15.85%) counts the risk-free rate twice, once on its own and once inside the market return. Source: SIDC M12 Study Outline Topic 6.3 Capital Asset Pricing Model; Bodie, Kane and Marcus, Investments, chapter 'The Capital Asset Pricing Model'; CFA Institute, Portfolio Risk and Return: Part II (2026 Level I): E(Ri) = Rf + βi[E(Rm) − Rf] (as at October 2026).