Question

The CAPM expected rate of return is equal to the A) time premium plus the default...

The CAPM expected rate of return is equal to the

A) time premium plus the default premium plus the expected risk premium.

B) default premium plus the expected risk premium.

C) time premium plus the default premium.

D) time premium plus the expected risk premium.
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Homework Answers

Answer #1

CAPM Equation is written as:

Expected rate of return = Risk free rate + Beta * Market Risk Premium

Now, the first half of equation, i.e., the risk free rate represents the time value of money and compensates the investors for placing money in any investment over time
The other half of the CAPM formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk, i.e., the expected risk premium.

Hence, the answer is D

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