Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be
A) Y.
B) A plus B.
C) Z minus A.
D) Z minus Y.

Question

Refer to the graph. The average expected rate of return for an asset with a beta equal to X would be
A) Y. 
B) A plus B. 
C) Z minus A. 
D) Z minus Y.

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model, the expected rate of return for an asset is determined by the risk-free rate, the market risk premium, and the asset's beta. The equation is: 
Expected return = Risk-free rate + (Market risk premium x Beta)
From the graph, we can see that the expected return for the market is A, and the market risk premium is B. Therefore, for an asset with a beta equal to X, the expected return would be:
Expected return = A + (B x X)
This is equivalent to answer choice B.

Refer to the Graph