Capital asset pricing models serve as an important tool for stock market analysts because
A) normal people cannot understand them.
B) they would otherwise not be able to price stocks.
C) they tell analysts which stocks and bonds have the strongest earnings potential.
D) require analysts to think about only risk-free and expected portfolio rates of return.
E) guarantee the construction of profitable financial portfolios.

Question

Quizplus · Accepted Answer

Capital asset pricing models (CAPM) help analysts by focusing on the relationship between the expected return of an investment and its risk, specifically considering risk-free rates of return and the expected returns of portfolios. This model does not guarantee profitable outcomes, nor does it directly indicate which stocks have the strongest earnings potential. It's a tool for understanding risk and return, not a direct method for stock selection or pricing without consideration of other factors.

Capital Asset Pricing Models Serve as an Important Tool for Stock