Assume that d is the discount factor, Rf is the risk free return, b is beta for a particular stock, and Rm is the market risk premium. According to the capital asset pricing model, the formula for finding the discount factor is

Question

Quizplus · Accepted Answer

The correct formula for finding the discount factor according to the capital asset pricing model is d = Rf + b(Rm). This means that the discount factor is equal to the risk-free rate plus the beta of the stock multiplied by the market risk premium. Option B is not correct because dividing Rf by b(Rm) does not result in a discount factor. Option C is incorrect because multiplying Rf by Rm does not give the discount factor. Option D is not correct because the formula for the discount factor is given in the problem.

Assume That D Is the Discount Factor, Rf Is the Risk