An application of the capital asset pricing model, called the security market line, is more inclusive than the dividend growth model for pricing stocks and provides expected returns for companies based on their risk, the premium for taking on risk, and the reward for waiting and not on their historical dividend
patterns.

Question

Quizplus · Accepted Answer

The statement is true as the security market line, which is a graph that plots the expected return of a stock based on its beta (i.e., risk), is a more comprehensive approach for pricing stocks than the dividend growth model, which focuses solely on historical dividend patterns. The security market line incorporates the concepts of risk premium and time value of money, providing a more accurate estimation of expected returns.

An Application of the Capital Asset Pricing Model, Called the Security