The expected return-beta relationship
A) is the most familiar expression of the CAPM to practitioners.
B) refers to the way in which the covariance between the returns on a stock and returns on the market measures the contribution of the stock to the variance of the market portfolio, which is beta.
C) assumes that investors hold well-diversified portfolios.
D) All of the options are true.
E) None of the options are true.

Question

Quizplus · Accepted Answer

The expected return-beta relationship is indeed a central concept of the Capital Asset Pricing Model (CAPM), which is widely recognized and used by practitioners. This relationship explains how the expected return on an investment is related to its risk, as measured by beta, which is the covariance of the investment's returns with the market's returns divided by the variance of the market's returns. CAPM also assumes that investors hold well-diversified portfolios, which allows unsystematic risk to be ignored, focusing only on systematic risk (beta).

The Expected Return-Beta Relationship