Question text

The standard deviation of the returns of AliGaga, a telephone/communication company located in Mexico is 18%, while the corresponding variance of the Mexico stock market index is 49%. The correlation between the two is 0.9. Suppose the Mexican stock market is segmented from the rest of the world and has an equity risk premium of 9% and risk free rate of 5%. Using the CAPM paradigm, the equity cost of capital of AliGaga is closest to:

Select one:

a. 8%

b. 9%

c. 7%

d. 10%