The CAPM provides a model of determining expected security returns that is:
A)Precise in its calculations of risk premiums
B)Imprecise, but generally an acceptable guideline
C)Excellent for high Beta stocks
D)Excellent for well-diversified portfolios

Question

Quizplus · Accepted Answer

The CAPM provides a generally acceptable guideline for determining expected security returns, but it is not precise in its calculations of risk premiums. The model is based on several simplifying assumptions, such as a single-factor model and efficient markets, which may not hold in all situations. However, the CAPM is still widely used in finance as a starting point for estimating expected returns and assessing the risk of securities. It is applicable to both high and low beta stocks, as well as to diversified portfolios.

The CAPM Provides a Model of Determining Expected Security Returns