What is the basic predication of the CAPM?
A) Investment risk increases with asset value.
B) The average return on a financial asset decreases with risk.
C) The average return on a financial asset increases with risk.
D) Investment risk decreases with asset value.

Question

Quizplus · Accepted Answer

The basic predication of the CAPM (Capital Asset Pricing Model) is that the average return on a financial asset (such as a stock or bond) increases with the level of risk assumed by the investor. This means that investors expect to be compensated for taking on more risk, and that the return they receive should be commensurate with the degree of risk they are willing to accept.

What Is the Basic Predication of the CAPM