Asked by Sewar Rawabdeh on May 06, 2024
Verified
Which of the following is the best definition of capital asset pricing model (CAPM) ?
A) Percentage of a portfolio's total value in a particular asset.
B) Group of assets such as stocks and bonds held by an investor.
C) The difference between the return on a risky investment and a risk-free investment
D) Return on a risky asset expected in the future.
E) Equation of the SML showing the relationship between expected return and beta.
Capital Asset Pricing Model
An approach outlining the connection between inherent risks and the expected return of assets, with a focus on stocks.
SML
The Security Market Line, a graphical representation used in the capital asset pricing model (CAPM) to show the relationship between the risk of an investment and its expected return.
Expected Return
The anticipated gain or loss on an investment, considering both the risk and return.
- Understand the principles of the Capital Asset Pricing Model (CAPM) and its significance for evaluating investments.
Verified Answer
HJ
Haylee JohnsonMay 10, 2024
Final Answer :
E
Explanation :
The Capital Asset Pricing Model (CAPM) is best defined as an equation of the Security Market Line (SML) that shows the relationship between the expected return of an investment and its beta, which measures the investment's volatility or risk compared to the market as a whole. This model helps in understanding the expected return on an asset for its given level of risk.
Learning Objectives
- Understand the principles of the Capital Asset Pricing Model (CAPM) and its significance for evaluating investments.