CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

The capital asset pricing model (CAPM) states that the expected ______
A. risk premium on an investment is proportional to its beta.
B. rate of return on an investment is proportional to its beta.
C. rate of return on an investment depends on the risk-free rate and the market rate of return.

User Contributed Comments 13

User Comment
murli C. missing the beta part of the SML equation.
murli So it is wrong, correct answer is A.
Iceblue but A is also not correct since there is another alpha term, it is not mathematically proportional,right?
muloma CAPM uses the SML which is plot of the return on the market against the systematic risk (beta) and the straight line graph shows proportionality between MRP and beta. A is correct.
Sidd2000 expected return also depends on risk free rate, so that's why expected risk premium is more correct
cFa106 Risk premium on an investment=beta x (...), while expected return= RFR+beta x (...). the question is all about the formal equation
lagoste I thought about risk premium being only:
(RM - RFR), therefore it does not involve beta. however, if you think about the equation, A is correct.
brandsat C is correct, it does not say "proportional", only "depends" However A is more correct and related to the CAPM.
jinquanli the required rate of return depends on the risk free rate and beta, the expected rate of return depends on the future price and dividend returns.
dblueroom I thought it was B. because expected risk premium is fixed, while beta affects expected return on an investment.
Profache C is wrong. It is also dependent on the beta of the stock
bodduna Well. Risk Premium = Beta*ERP.
I just overlooked. I mistook "expected" for "equity"
cmacewen The CAPM definition is that it precisely determines the expected return from an assets beta. The expected risk premium is the difference between the expected market risk and the risk free rate.
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