you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.

Question

Quizplus · Accepted Answer

If the slope of the regression line is negative, it means that the stock's returns move in the opposite direction of the market's returns. According to the CAPM, the required rate of return for a well-diversified investor on a stock is determined by the beta coefficient, which measures the systematic risk of the stock, not the slope of the regression line. Therefore, a negative slope does not necessarily imply that the required rate of return on the stock should be greater than the risk-free rate.

You Plotted the Returns on a Given Stock Against Those