The ________ describes the relationship between nondiversifiable risk and the required rate of return.
A) EBIT-EPS approach to capital structure
B) supply-demand function for assets
C) capital asset pricing model
D) Gordon model

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) is used to calculate the required rate of return for an asset based on its nondiversifiable risk. The CAPM equation is: required rate of return = risk-free rate + (market return - risk-free rate) × beta, where beta is a measure of an asset's nondiversifiable risk. Therefore, the CAPM directly relates nondiversifiable risk to the required rate of return for an asset.

The ________ Describes the Relationship Between Nondiversifiable Risk and the Required