The XYZ Corporation is thinking about investing in two new options, each option has a different level of risk that is associated with it. Option (A) is a new product and it is investing in a new market. Option (B) is an expansion of a well-established existing market. The risk-free rate is 2% and the expected rate of inflation is 3%. For a low risk investment XYZ Corporation expects 2%, but for a high risk investment XYZ Corporation expects 5%.
Calculate the required rate of return for options A and B.