An application of the capital asset pricing model,called the security market line,is more inclusive than the dividend growth model for pricing stocks and provides expected returns for companies based on their risk,the premium for taking on risk,and the reward for waiting and not on their historical pattern of dividends.

Question

Quizplus · Accepted Answer

The statement accurately describes the differences between the capital asset pricing model and the dividend growth model. The Capital Asset Pricing Model (CAPM) uses the security market line to determine expected returns for assets based on their level of risk and the risk premium, while the dividend growth model relies on the company's historical dividend growth to determine its future dividends and hence its stock price. Therefore, the statement is true.

An Application of the Capital Asset Pricing Model,called the Security