Using the Capital Asset Pricing Model (CAPM), an increase in the market rate of return will increase the expected rate of return on an individual security. Assume that the security's beta, the risk-free rate of return, and the market rate of return are all positive.

Question

Quizplus · Accepted Answer

According to the CAPM formula, the expected return on a security is equal to the risk-free rate plus the product of the security's beta and the market risk premium (the difference between the market rate of return and the risk-free rate). If the market rate of return increases while the risk-free rate and the security's beta remain constant, the market risk premium increases, leading to a higher expected return on the security.

Using the Capital Asset Pricing Model (CAPM), an Increase in the Market