Which of the following is correct regarding the CAPM?
A) The expected return for a particular asset depends on the pure time value of money as measured by beta.
B) The expected return for a particular asset depends on the amount of systematic risk as measured by the risk free rate.
C) The standard deviation for a particular asset depends on the reward for bearing risk as measured by beta.
D) Implicit in the CAPM is that all risky assets have the same reward to risk ratio.
E) The SML and CAPM illustrate that the higher the beta, the lower the expected return.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) implies that all risky assets should offer the same reward-to-risk ratio as measured by the market portfolio, which is a key concept underlying the Security Market Line (SML). This is because the CAPM formula calculates the expected return of an asset based on its systematic risk (beta), the risk-free rate, and the expected market return, suggesting that assets with higher systematic risk should offer higher expected returns to compensate for that risk, thus maintaining a consistent reward-to-risk ratio across different assets.

Which of the Following Is Correct Regarding the CAPM