A firm with a higher beta than another firm will have a higher required rate of return.
Beta is a direct measure of risk, so K_j must be higher.

Question

A firm with a higher beta than another firm will have a higher required rate of return. Beta is a direct measure of risk, so K_j must be higher.

Quizplus · Accepted Answer

Beta is a direct measure of systematic risk, which cannot be diversified away. Therefore, a firm with a higher beta indicates higher systematic risk and requires a higher rate of return to compensate investors for that risk.

A Firm with a Higher Beta Than Another Firm Will