Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?
A) If a stock has a negative beta,its required return under the CAPM would be less than 5%.
B) If a stock's beta doubled,its required return under the CAPM would also double.
C) If a stock's beta doubled,its required return under the CAPM would more than double.
D) If a stock's beta were 1.0,its required return under the CAPM would be 5%.
E) If a stock's beta were less than 1.0,its required return under the CAPM would be less than 5%.

Question

Quizplus · Accepted Answer

A negative beta implies that the stock moves inversely to the market. Under the Capital Asset Pricing Model (CAPM), a negative beta would result in a required return less than the risk-free rate, since the formula for CAPM is $R_i = R_f + \beta_i(E(R_m) - R_f)$, where $R_i$ is the required return on the investment, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the investment, and $E(R_m)$ is the expected return of the market. If $\beta_i$ is negative, it would subtract from the risk-free rate, leading to a required return less than 5%.

Assume That the Risk-Free Rate Is 5