Detailed Answer
Answer (A) is correct. The market return (RM), given as 12%, minus the risk-free rate (RF), 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 (?) 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% [RF + ? (RM – RF) = .05 + .6(.12 – 0.05)].