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

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model, the expected return on a security is positively and linearly related to the security's beta. The CAPM equation is expressed as:

Expected Return = Risk-Free Rate + Beta*(Market Risk Premium)

The market risk premium is the difference between the expected return on the market and the risk-free rate. Beta is a measure of the systematic risk or volatility of the security relative to the overall market. The higher the beta, the more sensitive the security is to changes in the market. Therefore, investors require a higher expected return to compensate for the increased risk.