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      Question

      Which of the following best describes the role of the

      Capital Asset Pricing Model (CAPM) in determining the required return on an asset in the capital market ?
      A CAPM calculates the intrinsic value of a stock by considering its earnings and dividend projections. Correct Answer Incorrect Answer
      B CAPM helps estimate the required return on an asset by accounting for its systematic risk relative to the market, using the risk-free rate and the market risk premium. Correct Answer Incorrect Answer
      C CAPM evaluates the liquidity risk of a stock by incorporating the bid-ask spread into its expected return Correct Answer Incorrect Answer
      D CAPM is used to determine the volatility of an asset based on historical price movements without factoring in broader market trends Correct Answer Incorrect Answer
      E CAPM applies only to private companies, helping them determine their cost of equity when going public Correct Answer Incorrect Answer

      Solution

      The Capital Asset Pricing Model (CAPM) estimates the required return on an asset by considering the systematic risk (beta) of the asset relative to the market . It uses the risk-free rate (such as the return on government bonds) and the market risk premium (the return expected from the market above the risk-free rate). This model assumes investors are rational and markets are efficient, helping investors make decisions based on the expected return given the asset's risk.

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