The Capital Asset Pricing Model develops a model of the return needed to own a share of stock based on the _______ return, and the market and firm specific risks.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) is based on the concept of a risk-free rate of return, which is used as a benchmark to compare the expected returns of other investments. The model assumes that investors are rational and risk-averse, and therefore need to be compensated for taking on additional market and firm specific risks. Thus, the model calculates the expected return on an investment by adding the risk-free rate to a premium or risk premium that is based on the level of risk associated with the investment.

The Capital Asset Pricing Model Develops a Model of the Return