The capital asset pricing model is given by R - R_f = α + β(R_M - R_f) + ε, where R_M= expected return on the market, R_f= risk-free market return, and R = expected return on a stock or portfolio of interest. The explanatory variable in this model is ________. A) R B) R - R_f _{_{_R_M _D)_R_M - R_f}}

Question

Quizplus · Accepted Answer

The explanatory variable in the capital asset pricing model is the difference between the expected return on the stock or portfolio of interest (R) and the risk-free market return (RS1U1B1fS1U1B0), adjusted for the stock's beta (S1U1B0S1U1B1) against the market (RS1U1B1MS1U1B0). Therefore, choice D (S1U1B0S1U1B1 RS1U1B0S1U1B1MS1U1B0 - RS1U1B1fS1U1B0) is the best choice.

The Capital Asset Pricing Model Is Given by R -