Question

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.
A) True
B) False

Answer 1

Answer:

B) False

Explanation:

CAPM formula for a stock's  expected rate of return is as follows;

CAPM  r = risk free rate + beta (rM - risk free rate)

r = expected return

rM = market return

As is seen in the above formula, the return is determined by the beta of the stock, risk free rate and the market return. If the beta of the stock increases assuming the market return and the risk-free rate remain constant, the stock's return will also increase and vice versa.