If you plotted the returns of 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 indicates the stock's returns are moving in the opposite direction of the market returns. According to the CAPM, the required rate of return for a well-diversified investor will be lower than the risk-free rate in such a scenario. Therefore, the statement in the question is incorrect.

If You Plotted the Returns of a Given Stock Against