The following are the data for the stock XYZ and the market index:

Expected return of XYZ is 18%;

Expected return of the market index is 12%;

Risk-free rate is 2.5%;

Standard deviation of returns for XYZ is 6%;

Standard deviation for the market index is 3%; and

Correlation coefficient between XYZ and the market index is 0.45.

Using the capital asset pricing model (CAPM), the required return of XYZ is closest to

1. 8.91%

2. 11.05%

3. 12.28%

4. 15.96%