Question

7) The capital asset pricing model: (a) Provides a risk return trade off in which risk is measured in terms of beta (b) Measures risk as the correlation coefficient between a security and market rates of return (c) Provides a risk return trade off in which risk is measured in terms of yield to maturity (d) None of the above

Answer 1

Answer: Provides a risk return trade off in which risk is measured in terms of beta (A)

Explanation:

The Capital Asset Pricing Model (CAPM) describes the relationship that exist between systematic risk and the expected return for assets, particularly stocks. The Capital Asset Pricing Model is widely used in finance for pricing risky securities and also for generating expected returns for an asset given the cost of capital and the risk of those assets.

The Capital Asset Pricing Model Formula is:

Expected Return= Risk-Free Rate+Beta( Market Return – Risk Free Rate).

For example, if the risk free rate is 10%, the market return is 15%, and the stock's beta is 3, then the expected return on the stock would be 25%

= 10% + 3 (15% – 10%)

= 10% + 3(5%)

= 10% + 15%

= 25%