According to the Capital Asset Pricing Model:
A)the expected return on a security is positively and linearly related to the security's beta.
B)the expected return on a security is negatively and linearly related to the security's beta.
C)the expected return on a security is positively and non-linearly related to the security's beta.
D)the expected return on a security is positively and linearly related to the security's variance.
E)the expected return on a security is negatively and non-linearly related to the security's beta.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) states that the expected return on a security is positively and linearly related to the security's beta. Beta measures the systematic risk of a security, or its sensitivity to general market movements. The CAPM formula is expressed as: Expected Return = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate). Therefore, the higher the beta, the higher the expected return.