Question

The capital asset pricing model suggests that the required return on a firm's stock is a positive function of:

unsystematic risk |
||

the market rate of return |
||

the competitor fs cost of equity |
||

All of these are correct. |

Answer #1

The formula to calculate required return using CAPM is -

Required return = risk free rate + beta (market premium)

Hence, the required return is positively realted to the risk free rate and the market premium. Unsystematic risk is not considered in CAPM. Nor do we use the competitors cost of equity. Hence, the correct answer is-

**The market rate of return.**

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STOCK
A
B
C
D
BETA
2.0
1.0
-0.5
0
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BETA
A
0.75
B
0.94
C
1.31
(Click on the icon located on the top-right corner of the data
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