According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A)R_f+ $\beta$ [E(R_M)]. B)R_f+$\beta$ [E(R_M) -R_f]. C)$\beta$ [E(R_M) -R_f]. D)E(R_M) +R_f.

Question

Quizplus · Accepted Answer

According to the CAPM, the expected rate of return on any security is equal to the risk-free rate plus a premium based on the market risk (beta). Thus, the equation is: 
Expected return = Risk-free rate + Beta * (Expected market return - Risk-free rate)
or 
E(Ri) = Rf + beta(Rm - Rf)

Option B is the closest match to this formula where expected return on a security is calculated as the sum of risk-free rate and the product of the market risk premium and the security's beta.

According to the Capital Asset Pricing Model (CAPM), the Expected β\betaβ

According to the Capital Asset Pricing Model (CAPM), the Expected $\beta$