Question

Assume that CAPM holds. Which of the following statements is TRUE?

a)Beta indicates a stock’s diversifiable risk

b)Two stocks with the same stand-alone risk must have the same betas

c)The slope of the security market line is given by the market risk premium

d)If the beta of a Stock doubles, then its required rate of return must also double

e)If the risk-free rate decreases, then the market risk premium must also decrease

Answer 1

As per CAPM required return = Rf + beta*(Rm - Rf)

Rf = risk free rate

Rm = return on market portfolio

Rm - Rf = market risk premium

a)

Beta represents systematic risk also known as non diversifiable risk so Option a is not true

b)

Stand alone risk is measured by standard deviation. it is not necessary that  Two stocks with the same stand-alone risk must have the same betas Option b is incorrect

c)

The slope of SML = Rm - Rf = Market risk premium Option C is true

d)

if beta doubles required return will not double Option d is false

e)

Option e also incorrect

Option c is True