Question

It is often claimed that the 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 measures the expected return on an asset through use of risk free return, market premium and beta. A stock with high beta is a growth stock and usually should have high expected returns while a stock with low beta has relatively low returns. The rich most often hold their stocks in asset classes which are more risky and volatile, implying stocks with high beta and therefore there is higher return associated with the risk undertaken. Also, these assets are often under less tax brackets as compared to the assets held by the middle class. The middle class invests in assets that are less pricy as they cannot afford to put in money in high valuable stocks. This leads to lesser returns from their investments.