To estimate the required return for a security using APT or CAPM, it is necessary to have:
A) last period's return, beta, and the standard deviation.
B) last period's return, beta, and the risk-free rate.
C) beta, the market risk premium, and the risk-free rate.
D) beta, last period's return, and the standard deviation.
E) beta, last period's return, and the market risk premium.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) requires the beta of the security, the market risk premium (the difference between the expected return of the market and the risk-free rate), and the risk-free rate to estimate the required return. The Arbitrage Pricing Theory (APT) might use different factors, but for a simplified comparison or in a basic application, these elements are also crucial. Last period's return and standard deviation are not necessary for the basic CAPM formula or a simplified APT approach.

To Estimate the Required Return for a Security Using APT