The expected return-beta relationship
A)is the most familiar expression of the CAPM to practitioners.
B)refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.
C)assumes that investors hold well-diversified portfolios.
D)All of the options are true.

Question

Quizplus · Accepted Answer

A) The expected return-beta relationship is indeed the cornerstone of the CAPM, which is widely used by practitioners in finance.
B) The covariance between a stock's returns and the returns on the market measures the extent to which the stock contributes to the market portfolio's variance, which is represented by beta. The expected return on a stock is a function of its beta and the expected return on the market, according to the CAPM.
C) The CAPM assumes that investors can diversify away unsystematic risk, and hence only the systematic risk matters for asset pricing.
D) All of the statements are true, hence D is the correct answer.

The Expected Return-Beta Relationship