According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to A) R_f + β [E(R_M)]. B) R_f + β [E(R_M) −R_f]. C) β [E(R_M) −R_f]. D) E(R_M) + R_f.

Question

Quizplus · Accepted Answer

The CAPM formula states that the expected return on a security is equal to the risk-free rate plus the product of the security's beta and the expected market risk premium (which is the difference between the expected market return and the risk-free rate). Option B correctly represents this formula.

According to the Capital Asset Pricing Model (CAPM), the Expected