Suppose the domestic U.S.beta of IBM is 1.0,that is $$\beta _ { \mathrm { IBM } } ^ { \mathrm { U } . \mathrm { S } } = 1.0$$ ,and that the expected return on the U.S.market portfolio is $\bar { R } _ { \text {U.S. } } = 12$ percent,and that the U.S.T-bill rate is 6 percent.If the world beta measure of IBM is $\beta _ { \mathrm { IBM } } ^ { \text {world } } = 0.80$ then we can say

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The world beta measure of IBM is 0.80, which means that IBM's systematic risk is lower in the world market than in the U.S. market. If the U.S. markets are fully integrated with the rest of the world, IBM would benefit from the diversification, and its cost of equity capital would be lower than if U.S. markets were segmented. However, we cannot say that the cost of equity capital would be 20% lower since the world beta measure is only 20% lower than the domestic beta. Instead, we can calculate the cost of equity using the CAPM:

$$r _ { \mathrm { IBM } } = 6 \% + 0.80 \times ( 12 \% - 6 \% ) = 10.4 \%$$

If the U.S. markets were segmented, we would use the domestic beta of 1.0, and the cost of equity capital would be:

$$r _ { \mathrm { IBM } } = 6 \% + 1.0 \times ( 12 \% - 6 \% ) = 12 \%$$

Therefore, if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital would be 10% lower than if U.S. markets were segmented. The correct answer is B.

Suppose the Domestic U βIBMU.S=1.0\beta _ { \mathrm { IBM } } ^ { \mathrm { U } . \mathrm { S } } = 1.0βIBMU.S​=1.0

Suppose the Domestic U $\beta _ { \mathrm { IBM } } ^ { \mathrm { U } . \mathrm { S } } = 1.0$