Question

Which of the following is not true about CAPM? Multiple Choice

Not all assumptions of CAPM are realistic

CAPM allows for multiple sources of systematic risk

The expected return of a security with a beta of zero is the risk-free rate

Expected returns increase with higher beta

Answer 1

The Formula for CAPM is R = Rf + (Rm - Rf)

Not all assumptions of CAPM are realistic - True

The following are some assumptions of CAPM

1. Markets are ideal

2. Rational Investors

3. Markets are in equilibrium

4. Investors can Borrow/lend unlimited amounts

5. Equal access to infromation

6. Beta is the ony measure of risk

The following assumptions are not realistic so the above statement is correct

CAPM allows for multiple sources of systematic risk - False

CAPM has Beta and it is the only source of systematic risk

The expected return of a security with a beta of zero is the risk-free rate - True

If you put Beta as zero in formula, you will Rf so the Beta zero stock would be expected to give risk free retrun

Expected returns increase with higher beta

If Rf and Rm remains unchanged but beta is increased then the expected returns would increase.