According to the capital asset pricing model, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive.
I. increase in the risk-free rate
II. decrease in the risk-free rate
III. increase in the market risk premium
IV. decrease in the market rate of return
A)I and III only
B)II and III only
C)I and IV only
D)II and IV only
E)II, III, and IV only

Question

Quizplus · Accepted Answer

The expected rate of return on a security according to the Capital Asset Pricing Model (CAPM) is given by the formula: $E(R_i) = R_f + \beta_i(E(R_m) - R_f)$, where $E(R_i)$ is the expected return on the security, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the security, and $E(R_m)$ is the expected return of the market. An increase in the risk-free rate ($R_f$) directly increases the expected return on the security. An increase in the market risk premium ($E(R_m) - R_f$) also increases the expected return, as the security's return is positively related to the market risk premium through its beta.

According to the Capital Asset Pricing Model, Which of the Following