The capital asset pricing model uses three variables to evaluate required returns on common equity: the risk-free rate,the beta coefficient,and the market risk premium.

Question

Quizplus · Accepted Answer

The statement accurately describes the components of the capital asset pricing model (CAPM). The risk-free rate represents the return investors can earn without taking on any risk, beta measures the volatility of a stock in relation to the overall market, and the market risk premium reflects the expected return of the market above the risk-free rate. These three variables are used to calculate the required return an investor would expect to earn for taking on the risk of investing in a particular stock.

The Capital Asset Pricing Model Uses Three Variables to Evaluate