2. Suppose the Mexican stock market is segmented from the rest of the world. Using the CAPM paradigm, estimate the equity cost of capital of Telmex.

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Correlation Coefficients Telmex Mexico World SD (%) R(%) Telmex Mexico 1.00 .90 0.60 18 ? 1.00 0.75 15 14 World 1.00 10 12 The above table provides the correlations among Telmex, a telephone/communication company located in Mexico, the Mexico stock market index, and the world market index, together with the standard deviations (SD) of returns and the expected returns (R). The risk-free rate is 5%.