CFA Practice Question

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CFA Practice Question

The Capital Asset Pricing Model (CAPM) is best described as the ______.

A. simple relationship between risk and return
B. theoretical relationship between systematic risk and expected return
C. graphical depiction of the risk-return relationship
Correct Answer: B

The CAPM is the theoretical relationship between systematic risk and expected return, which, when graphed, gives us the SML.

User Contributed Comments 8

User Comment
eb2568 CAPM is useless in the real world
AusPhD So true eb2586
bmeisner I don't think CAPM is useless. In the US the stock market has consistently outperformed the risk free government bond return over long periods of time. This outperformance reflects market risk premium, individuals are risk averse and hence demand higher return for higher perceived risk. One might argue that beta is not the best measure of relative risk but it at least offers a sensible solution to risk-weighted return based in theory.
jaroslavb yes, it is useless in real world
mattg It's just a guideline to generate ideas and test theories, not a crystal ball
jpducros and as a guideline, it is very used.
Shaan23 It's useless. THink about it. It's not possible to follow all the CAPM assumptions. Eg. Investors have homogenous expectations...etc
blablabob True, according to the CAPM low beta stock should provide lower return than high beta stocks nevertheless low beta stock have outperformed high beta stocks regarding their returns
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