If the risk - free return (Rf) is 6%, Beta value (β) is 1.5 and market rate of return (Km) is 10%, the expected rate of return would be

1. 15%

2. 12%

3. 17.5%

4. 16% 

The Capital Asset Pricing Model (CAPM) is developed by Sharpe, Linter, and Mossin. The CAPM describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return then the investment should not be undertaken. 

The main insights of CAPM are :

1. Investors need to be rewarded for systematic risk (β) only because unsystematic risk can be reduced to zero through diversification of the investment portfolio.
2. A security’s systematic risk is measured by beta value.
3. The required rate of return on a security depends on the riskless rate of interest the market risk premium and the security’s beta value.

Formula: R = rf + ß (rm - rf)

where, R = Expected rate of return,  rf = Risk free rate, rm = Market rate of return, ß = Project beta (systematic risk) 

R = 6 + 1.5 (10 - 6) = 12%

Therefore, If the risk - free return (Rf) is 6%, Beta value (β) is 1.5 and market rate of return (Km) is 10%, the expected rate of return would be 12%