Which of the following statements is true?
A) Asset prices and average expected rates of return are directly related, but levels of nondiversiﬁable risk and average expected rates of return are inversely related.
B) Asset prices and average expected rates of return are inversely related, but levels of nondiversiﬁable risk and average expected rates of return are directly related.
C) Asset prices, average expected rates of return, and levels of nondiversiﬁable risk are all directly related.
D) Average expected rates of return are inversely related to both asset prices and levels of nondiversiﬁable risk.

Question

Quizplus · Accepted Answer

This statement is consistent with the capital asset pricing model (CAPM), which assumes that asset prices and average expected rates of return are negatively correlated, while levels of nondiversifiable risk (as measured by beta) and average expected rates of return are positively correlated. This relationship is determined by the security market line, which plots the expected return of an asset based on its beta and the expected return on the overall market.

Which of the Following Statements Is True