The CAPM provides a model of determining expected security returns that is:
A) precise in its calculations of risk premiums.
B) imprecise, but generally an acceptable guideline.
C) excellent for high beta stocks.
D) excellent for well-diversified portfolios.

Question

Quizplus · Accepted Answer

The CAPM model is based on several assumptions and simplifications, which may not accurately reflect the real-world investment environment. Despite its limitations, it is generally deemed an acceptable guideline to estimate expected security returns. However, the CAPM may not always accurately forecast the returns of high beta stocks and well-diversified portfolios. Therefore, the best answer is B, imprecise but generally an acceptable guideline.

The CAPM Provides a Model of Determining Expected Security Returns