The basic tenet of the CAPM is that a stock's expected risk premium should be:
A) greater than the expected market return.
B) proportionate to the market return.
C) proportionate to the stock's beta.
D) greater than the risk-free rate of return.

Question

Quizplus · Accepted Answer

The CAPM states that a stock's expected risk premium should be proportionate to the stock's beta, which measures its volatility in relation to the overall market. This means that stocks with higher betas should have higher expected risk premiums, while stocks with lower betas should have lower expected risk premiums. The expected market return and the risk-free rate of return are used as inputs in the CAPM formula for determining a stock's required rate of return, but they do not determine its expected risk premium directly.

The Basic Tenet of the CAPM Is That a Stock's