Question

Claim : Rich earn greater return on their assets than middle class or poorer households.

Evaluate this statement with reference to the CAPM model.

Answer 1

CAPM Model refers to the Capital Asset Pricing Model, This model determines the relationship between the Risk and the return of the portfolios, When there is greater beta which determines the risk then there is excess return on the portfolio, Similarly, Lower risk will leads to lower expected return.

CAPM Equation

Expected Return = Rf + B( Rm - Rf)

Where, Rf is Risk Free rate

B is Beta

Rm is Market Return

The Claim is Richer earn greater return on their assets than middle class or poorer households is true as the Middle class or poorer households will be more risk averse and has low disposable income while the richer would like to earn more returns by adding more risk in the portfolio, thus, earning greater returns.