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    Question

    According to the Capital Asset Pricing Model (CAPM), the

    expected return on a security is determined by:
    A Its total risk Correct Answer Incorrect Answer
    B Its unsystematic risk Correct Answer Incorrect Answer
    C Its beta coefficient relative to the market portfolio Correct Answer Incorrect Answer
    D Its correlation with risk-free assets Correct Answer Incorrect Answer
    E The firm’s dividend yield Correct Answer Incorrect Answer

    Solution

    CAPM: E(Ri)=Rf+βi[E(Rm)−Rf]E(Ri) = Rf + βi [E(Rm) - Rf]E(Ri ​ )=Rf ​ +βi ​ [E(Rm ​ )−Rf ​ ]. Hence, expected return depends on systematic risk (beta).

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