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The Capital Asset Pricing Model (CAPM) establishes the relationship between
- a)risk and EPS
- b)risk and value of the firm
- c)risk and the required rate of return
- d)None of the above
Correct answer is option 'C'. Can you explain this answer?
Verified Answer
The Capital Asset Pricing Model (CAPM) establishes the relationship be...
The Capital Asset Pricing Model (CAPM) is a finance theory that establishes a linear relationship between the required return on an investment and risk.
The model is based on the relationship between an asset's beta, the risk-free rate (typically the Treasury bill rate) and the equity risk premium, or the expected return on the market minus the risk-free rate.
The model is based on the relationship between an asset's beta, the risk-free rate (typically the Treasury bill rate) and the equity risk premium, or the expected return on the market minus the risk-free rate.
Most Upvoted Answer
The Capital Asset Pricing Model (CAPM) establishes the relationship be...
The Capital Asset Pricing Model (CAPM) is a finance theory that establishes a linear relationship between the required return on an investment and risk.
The model is based on the relationship between an asset's beta, the risk-free rate (typically the Treasury bill rate) and the equity risk premium, or the expected return on the market minus the risk-free rate.
The model is based on the relationship between an asset's beta, the risk-free rate (typically the Treasury bill rate) and the equity risk premium, or the expected return on the market minus the risk-free rate.
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The Capital Asset Pricing Model (CAPM) establishes the relationship be...
The Capital Asset Pricing Model (CAPM) establishes the relationship between risk and the required rate of return.
- **Risk and Return Relationship**
- CAPM helps in determining the expected return on an investment based on its level of risk.
- It states that the expected return on an investment should be proportionate to its risk level.
- **Components of CAPM**
- CAPM considers the risk-free rate, beta (systematic risk), and market risk premium in its calculation.
- The risk-free rate represents the return on a risk-free investment.
- Beta measures the volatility of a stock in relation to the market.
- Market risk premium is the excess return expected from the market over the risk-free rate.
- **Calculation of Required Rate of Return**
- The formula for CAPM is:
- Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
- This formula helps in determining the required rate of return for an investment based on its risk profile.
- **Significance of CAPM**
- CAPM is widely used in finance for estimating the expected return on an investment.
- It helps in comparing different investments by considering their risk-return tradeoff.
- **Conclusion**
- In conclusion, the Capital Asset Pricing Model (CAPM) establishes the relationship between risk and the required rate of return. By considering the risk-free rate, beta, and market risk premium, CAPM helps investors in making informed decisions regarding their investments.
- **Risk and Return Relationship**
- CAPM helps in determining the expected return on an investment based on its level of risk.
- It states that the expected return on an investment should be proportionate to its risk level.
- **Components of CAPM**
- CAPM considers the risk-free rate, beta (systematic risk), and market risk premium in its calculation.
- The risk-free rate represents the return on a risk-free investment.
- Beta measures the volatility of a stock in relation to the market.
- Market risk premium is the excess return expected from the market over the risk-free rate.
- **Calculation of Required Rate of Return**
- The formula for CAPM is:
- Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)
- This formula helps in determining the required rate of return for an investment based on its risk profile.
- **Significance of CAPM**
- CAPM is widely used in finance for estimating the expected return on an investment.
- It helps in comparing different investments by considering their risk-return tradeoff.
- **Conclusion**
- In conclusion, the Capital Asset Pricing Model (CAPM) establishes the relationship between risk and the required rate of return. By considering the risk-free rate, beta, and market risk premium, CAPM helps investors in making informed decisions regarding their investments.
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The Capital Asset Pricing Model (CAPM) establishes the relationship betweena)risk and EPSb)risk and value of the firmc)risk and the required rate of returnd)None of the aboveCorrect answer is option 'C'. Can you explain this answer?
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