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    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 _____

    A Equal to the security's beta Correct Answer Incorrect Answer
    B Based on the unsystematic risk of the security Correct Answer Incorrect Answer
    C Based on the total risk of the security Correct Answer Incorrect Answer
    D Based on the systematic risk of the security Correct Answer Incorrect Answer

    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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