The Capital Asset Pricing Model (CAPM) which: Question 1 options: that relates e
ID: 2399908 • Letter: T
Question
The Capital Asset Pricing Model (CAPM) which:
Question 1 options:
that relates expected rates of returns to assets to the standard deviation of their returns.
that relates expected rates of returns to assets to their variance of their returns.
that relates expected rates of returns to assets to their average returns.
that relates expected rates of returns to assets to their beta (related to the correlation of their returns with the market return).
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that relates expected rates of returns to assets to the standard deviation of their returns.
that relates expected rates of returns to assets to their variance of their returns.
that relates expected rates of returns to assets to their average returns.
that relates expected rates of returns to assets to their beta (related to the correlation of their returns with the market return).
Explanation / Answer
answer: that relates expected rates of returns to assets to their beta.
CAPM is a model that describes relationship between expected return and risk of investing in a security. It shows that expected return on a security is equal to risk free return plus risk premium which is based on beta of that security. The formula to calculate CAPM is
Expected return= Riskfree rate + (Beta*Market risk premium)