Answer:
e. the expected return on a security is positively and linearly related to the security's beta.
Explanation:
As per CAPM: Expected return (ER) = Rf + \beta (Rm - Rf)
Lets assume risk free return (Rf) as 5%, \beta as 2 and expected market return (Rm) as 10%
then, ER = 5% + 2 (10% - 5%) = 15%
However if lets assume all the other factors remain the same and \beta increases to 3
then, ER = 5% + 3 (10% - 5%) = 20%
Similarly if \beta reduces to 1
then, ER = 5% + 1 (10% - 5%) = 10%
So higher the \beta higher is the risk and hence higher the expected return. Hence expected return on a security is positvely and linearly related to the security's beta
