Question

Under the CAPM, investors with high wealth and low risk aversion have more impact on stock...

  1. Under the CAPM, investors with high wealth and low risk aversion have more impact on stock prices than do investors with low wealth and high risk aversion.

    True

    False

Homework Answers

Answer #1

The above statement is FALSE.

CAPM describes the relationship between systematic risk and expected return for assets. CAPM is widely used for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

The beta of a potential investment is a measure of how much risk the investment will add to a portfolio that looks like the market. If a stock is riskier than the market, it will have a beta greater than one. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio.

Thus, higher the risk (beta), greater the impact on stock prices.

Incase of any doubt, please comment below. I would be happy to help.
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