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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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