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Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance...

Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the expected return from the insurance company is _____.

(a) 23%

(b) 8%

(c) 14%

(d) 10%

(e) 29%

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Answer #1

expected return from the insurance company=Risk free rate+Beta*Market risk premium

=8+(2.5*6)

=23%(A)

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