In comparing the constant growth model and the capital asset pricing model (CAPM) to calculatethe cost of common stock equity,
A) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk.
B) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors.
C) the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk.
D) the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta.

Question

Quizplus · Accepted Answer

The CAPM considers risk directly through the beta, which measures the stock's sensitivity to market movements, while the constant growth model uses the market price to reflect investors' risk-return preferences.

In Comparing the Constant Growth Model and the Capital Asset