The Capital Asset Pricing Model
A)provides a risk-return trade-off in which risk is measured in terms of the market returns.
B)provides a risk-return trade-off in which risk is measured in terms of beta.
C)measures risk as the correlation coefficient between a security and market rates of return.
D)depicts the total risk of a security.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) provides a risk-return trade-off in which risk is measured in terms of beta, which is the sensitivity of a security's returns to market returns. Beta is used to estimate the expected return of a security based on the risk-free rate, market risk premium, and the security's beta. Therefore, B is the correct choice. Choice A is incorrect because risk is not measured in terms of market returns, but rather beta. Choice C is incorrect because the correlation coefficient is not used to measure overall risk in the CAPM. Choice D is incorrect because the CAPM uses beta to measure systematic risk, not total risk.