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Answer (A) is correct . The market return (R M ), given as 12%, minus the risk-free rate (R F), given as 5%, is the market risk premium. It?is the rate at which investors must be compensated to induce them to invest in the market. The beta coefficient ( β) of an individual stock, given as 60%, is the correlation between volatility (price variation) of the stock market and the volatility of the price of the individual stock. Consequently, the expected rate of return is 9.20% [R F + β (R M – RF ) = .05 + .6(.12 – .05)].

Answer (B) is incorrect because This percentage equals the risk-free rate plus 60% of market rate.
Answer (C) is incorrect because This percentage results from multiplying both the market rate premium and the risk-free rate by 60%.
Answer (D) is incorrect because This percentage is the market rate.