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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Step by step
Solved in 2 steps
- The market efficiency hypothesis claims that, as a rule, the market value and intrinsic value of a security are equal. True False.What is the expected return of a zero-beta security?a. Market rate of return.b. Zero rate of return.c. Negative rate of return.d. Risk-free rate of return.A risky security has less risk than the overall market. What must the beta of this security be? O 0 but< 1 O 1 O The beta cannot be determined based on the information provided.
- The slope of the security market line cannot be negative. Begin your answer with Consistent or Inconsistent followed by your explanation.A security with only diversifiable risk has an expected return that exceeds the riskfree rate of return. Begin your answer with Consistent or Inconsistent followed by your explanation.Which of the following statements are true if the efficient market hypothesis holds?a. It implies that future events can be forecast with perfect accuracy.b. It implies that prices reflect all available information.c. It implies that security prices change for no discernible reason.d. It implies that prices do not fluctuate.
- Market potential is an example of an economic risk measure. O True O FalseGiven the beta is a relative measure of systematic risk, it is reasonable to assume that there exists a relationship between required rate of return and beta. The nature of this relationship is captured in: a. None of the above b. Security Market Line c. Stock Market Equilibrium d. Inflation RiskIf we are speaking about the CAPM model and undiversifiable risks. Then what is meant by returns which are not captured by the market return.
- Determine how the appropriate yield to be offered on a security is affected by a higher risk-free rate. Explain the logic of this relationship. . Determine how the appropriate yield to be offered on a security is affected by a higher default risk premium. Explain the logic of this relationship.Which of the following statements about the Security Market Line are correct? I. The intercept point is the market rate of return. II. The slope of the line is beta. III. An investor should accept any return located above the SML line. IV. A beta of 0.0 indicates the risk-free rate of returnThe risk-free security has a beta equal to ________ , while the market portfolio's beta is equal to _______. more than one ; one less than one; one zero; one less than zero; more than zero