For a risk-free return rate of 5%, a market risk premium of 6%, what is the required rate of return for a security with a beta coefficient of 1.5? 5% 9% 14% cannot be determined
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.
Exploring Finance: Security Market Line.
Security Market Line
Conceptual Overview: Explore the determinants of the security market line.
The Security Market Line defines the required
1. For a risk-free return rate of 5%, a market risk premium of 6%, what is the required rate of return for a security with a beta coefficient of 1.5?
- 5%
- 9%
- 14%
- cannot be determined
2. Changing the risk-free return (inflation)
- Changes neither the y-intercept nor the slope of the security market line
- Changes only the y-intercept of the security market line
- Changes only the slope of the security market line
- Changes both the y-intercept and the slope of the security market line
3. Changing the market risk premium
- Changes neither the y-intercept nor the slope of the security market line
- Changes only the y-intercept of the security market line
- Changes only the slope of the security market line
- Changes both the y-intercept and the slope of the security market line
4. True or False: If a company's beta doubles, its required return doubles.
- True
- False
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