Which one of the following is the formula that explains the relationship between the expected return on a security and the level

Question

3 years ago

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Which one of the following is the formula that explains the relationship between the expected return on a security and the level

of that security's systematic risk?
A. expected risk formula
B. time value of money equation
C. market performance equation
D. unsystematic risk equation
E. capital asset pricing model

Business

1 answer:

Stels [109] · Answer 1 · 2022-01-13T23:57:02+03:00

Answer: E. Capital asset pricing model

Explanation:

The Capital Asset Pricing model can be used to calculate the expected return of a security given some variables including its systematic risk which is measured by its beta.

The formula is;

Expected Return = Risk free rate + beta(market premium)

The model therefore shows that when the systematic risk is high, the expected return will also be high as well as helping to show the magnitude of the effect of a change in the market premium.