Question
According to the capital-asset pricing model (CAPM), a
security's required return is equal to the risk-free rate plus a premium. This premium is _____Solution
Answer: D The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security which is a measure of the systematic risk of that security . The CAPM formula is: ra = rrf + Ba (rm-rrf) where: rrf = the rate of return for a risk-free security rm = the broad market 's expected rate of return Ba = beta of the asset / Systematic risk or volatility of the stock
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