Based on the capital asset pricing model, investors are compensated based on which of the following? I. market risk premium
II) portfolio standard deviation
III) portfolio beta
IV) risk-free rate
A) I and III only
B) II and IV only
C) I, II, and III only
D) I, III, and IV only
E) I, II, III, and IV

Question

Quizplus · Accepted Answer

According to the capital asset pricing model, investors are compensated for taking on market risk (I), which is measured by the market risk premium, as well as for taking on additional risk in relation to the overall market (III), which is measured by the portfolio beta. In addition, investors are compensated for the time value of money (IV), which is represented by the risk-free rate. Portfolio standard deviation (II) is not a factor that directly influences compensation according to the CAPM.

Based on the Capital Asset Pricing Model, Investors Are Compensated