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Suppose the domestic U.S. beta of IBM is 1.0, that is  and that the expected return on the U.S. market portfolio

and the world market portfolio are both 10%, and that the U.S. T-bill rate is 6 percent. If the world beta measure of IBM is 0.7,  then we can say


  1. That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital would be 13.64% lower than if U.S. markets were segmented.
  2. That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital would be 12% lower than if U.S. markets were segmented.
  3. That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital would be one-third lower than if U.S. markets were segmented.
  4. None of the above


PLEASE EXPLAIN

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