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    Question

    The risk adjusted discount rate can be calculated by

    the following method:
    A Dividend discount model Correct Answer Incorrect Answer
    B Free cash flow method Correct Answer Incorrect Answer
    C Capital Asset Pricing Model Correct Answer Incorrect Answer
    D None of the above Correct Answer Incorrect Answer
    E Either a or b Correct Answer Incorrect Answer

    Solution

         The Capital Asset Pricing Model (CAPM) describes the relationship between systematic   risk (i.e. non-diversifiable risks) and expected return for equity. As such, it compensates the investors by giving the risk premium for undertaking the systematic risk.

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