Which of the following statements is correct?
A) The expected total return of the stock should equal the expected return of other investments available in the market with higher risk.
B) The expected total return of the stock should equal the expected return of other investments available in the market with lower risk.
C) The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk.
D) The expected total return of the stock should equal the expected return of other investments available in the market with different risk.

Question

Quizplus · Accepted Answer

The expected total return of the stock should equal the expected return of other investments available in the market with equivalent risk. This is because investors are generally risk-averse and will demand a higher return for taking on higher levels of risk. Therefore, if two investments have the same level of risk, they should have the same expected return. This principle is known as the capital asset pricing model (CAPM).

Which of the Following Statements Is Correct