One way of calculating K_e is to use the Capital Asset Pricing model, as follows:

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) is a formula that calculates the expected return on an investment based on the risk-free rate, the expected market return, and the investment's beta (systematic risk). Option C presents the correct formulation of the CAPM, where K_e is the expected return on the investment, R_F is the risk-free rate, b is the investment's beta, and K_M is the expected market return. Option A is incorrect because it does not use the beta, and Option B is incorrect because it does not include the investment's beta or the expected market return. Option D is incorrect because it uses the dividend yield and growth rate, which are metrics used for valuing stocks, not for calculating expected returns. Option E is incorrect because, like Option A, it does not use the beta.

One Way of Calculating Ke Is to Use the Capital

One Way of Calculating K_e Is to Use the Capital