According to the Capital Asset Pricing Model (CAPM),the expected rate of return on any security is equal to A) R_f + β[E(R_M)]. B) R_f + σ[E(R_M)- R_f]. C) R_f + β[E(R_M)- R_f]. D) E(R_M)+ R_f. E) none of these.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to the risk-free rate (RS1U1B0) plus the product of the security’s beta (β) and the expected market risk premium, which is the market risk premium (E(RS1U1B1MS1U1B0)) minus the risk-free rate (RS1U1B0). Mathematically it can be represented as RS1U1B1 = RS1U1B1fS1U1B0 + β[E(RS1U1B1MS1U1B0) - RS1U1B1fS1U1B0)]. Therefore, the best choice is C as it represents the formula correctly.

According to the Capital Asset Pricing Model (CAPM),the Expected Rate