Which of the following is the correct calculation for the required rate of retur
ID: 2806984 • Letter: W
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Which of the following is the correct calculation for the required rate of return under the CAPM? 15. a. beta (market risk premium) b. beta +market risk premium c. risk-free rate + risk premium d. risk-free rate(market risk premium) 16· The is a plot of a. CML... individual stocks and efficient portfolios b. CML... both efficient and inefficient portfolios, only C. d· SNL . . . individual securities, inefficient portfolios, and efficient portfolios. 17. If a certain stock has a beta greater than 1.0, it means that the stock's return is more volatile than that of the market portfolio. an investor can eliminate the risk by combining it with another stock that has a negative beta. an investor will earn a higher return on his stock than that on the market portfolio. a. b. c. d. the stock is less risky than the market portfolio.Explanation / Answer
15. Which of the following is the correct calculation for the required rate of return under the
CAPM'?
Answer: Option (a) beta (market risk premium)
Explanantion: Expected Return as per CAPM
Expected Return = Risk Free Rate + Beta*(Market Rate – Risk Free Rate)
Where “Market Rate-Risk free rate” means Market risk premium.
16. The…………is a plot of………….
Answer: Option (d) SML… individual securities, inefficient portfolios and efficient portfolios.
Explanation:
The security market line (SML) is a line drawn on a chart that serves as a graphical representation of the capital asset pricing model (CAPM), which shows different levels of systematic, or market, risk of various marketable securities plotted against the expected return of the entire market at a given point in time. Also known as the "characteristic line," the SML is a visual of the capital asset pricing model (CAPM), where the x-axis of the chart represents risk in terms of beta, and the y-axis of the chart represents expected return. The market risk premium of a given security is determined by where it is plotted on the chart in relation to the SML.
The capital market line (CML) appears in the capital asset pricing model to depict the rates of return for efficient portfolios subject to the risk level (standard deviation) for a market portfolio and the risk-free rate of return. The capital market line conveys the return of an investor for a portfolio. Single assets and nonefficient portfolios are not depicted on the CML.
17. If a certain stock has a beta greater than 1.0, it means that
Answer: Option (a) the stock's return is more volatile than that of the market portfolio.
Explanation:
A beta of 1 indicates that the security's price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market.
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