Asked by Nicole Nagatoshi on Jul 09, 2024
Verified
Based upon the capital asset pricing model, an asset which has more systematic risk than the market:
A) Will earn a rate of return that is greater than the risk-free rate but less than the market rate.
B) Will have a beta greater than 0 but less than 1.
C) Should have a reward-to-risk ratio which is greater than that of the market.
D) Should earn a rate of return which places it on the security market line.
E) Should earn a rate of return which places it above the security market line.
Systematic Risk
The risk inherent to the entire market or market segment, unavoidable through diversification.
Security Market Line
A line that represents the relationship between the risk of an investment and its expected return, based on the capital asset pricing model (CAPM).
Risk-Free Rate
The theoretical rate of return on an investment with no risk of financial loss, often represented by government bonds.
- Detail the workings of the Capital Asset Pricing Model (CAPM), emphasizing the roles of beta and the risk premium within it.
Verified Answer
YZ
yuxiang zhangJul 16, 2024
Final Answer :
D
Explanation :
According to the Capital Asset Pricing Model (CAPM), all assets should earn a rate of return that places them on the Security Market Line (SML) if the market is in equilibrium. The SML represents the expected return of a security based on its systematic risk (beta). An asset with more systematic risk than the market will have a beta greater than 1, and its expected return will be higher than the market return, but it will still lie on the SML.
Learning Objectives
- Detail the workings of the Capital Asset Pricing Model (CAPM), emphasizing the roles of beta and the risk premium within it.