The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium.

Question

Quizplus · Accepted Answer

According to CAPM, the formula for calculating the expected return on a stock is:

Expected return on stock = Risk-free rate + Beta (Market risk premium)

In this formula, beta measures the stock's volatility compared to the overall market. The market risk premium is the expected return of the market minus the risk-free rate. Multiplying beta with the market risk premium gives us the risk premium on the stock. Therefore, the statement "The Capital Asset Pricing Model (CAPM) says that the risk premium on a stock is equal to its beta times the market risk premium" is true.

The Capital Asset Pricing Model (CAPM) Says That the Risk