Based on the capital asset pricing model,which one of the following must increase the expected return on an individual security,all else constant?
A)An increase in the risk level of that security as measured by the standard deviation
B)An increase in the risk-free rate given a security beta of 1.42
C)A decrease in the market rate of return given a security beta of 1.13
D)A decrease in the market rate of return given a security beta of .78
E)A decrease in the risk-free rate given a security beta of 1.06

Question

Quizplus · Accepted Answer

According to the capital asset pricing model (CAPM), the expected return on an individual security is equal to the risk-free rate plus the security's beta times the market risk premium. Therefore, an increase in the risk-free rate (option E) will increase the expected return on the individual security, all else constant. Options A, B, C, and D describe changes that could affect the expected return, but each one would actually decrease the expected return on the security.

Based on the Capital Asset Pricing Model,which One of the Following