The fact that tests have shown the CAPM intercept to be greater than the RFR is consistent with a(n)
A) zero beta model.
B) unstable beta or a higher borrowing rate.
C) zero beta model or a higher borrowing rate.
D) higher borrowing rate.
E) unstable beta.

Question

Quizplus · Accepted Answer

The CAPM (Capital Asset Pricing Model) intercept being greater than the risk-free rate (RFR) suggests that the expected return on a zero-beta portfolio (which should theoretically equal the RFR) is higher than the RFR itself. This discrepancy can be explained by either a zero beta model, where the zero-beta portfolio does not simply earn the RFR, or by a higher borrowing rate, which would increase the expected return required by investors.

The Fact That Tests Have Shown the CAPM Intercept to Be