Assume that the risk-free rate is 5%.Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is $R_i = R_f + \beta_i(E[R_m] - R_f)$, where $R_i$ is the expected return of the investment, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the investment, and $E[R_m]$ is the expected return of the market. A negative beta implies that the investment moves in the opposite direction of the market. Therefore, if a stock has a negative beta, its required return under the CAPM would indeed be less than the risk-free rate of 5%, assuming the expected market return is greater than the risk-free rate. This is because the formula would involve subtracting a positive value (since $\beta_i$ is negative and $E[R_m] - R_f$ is positive) from the risk-free rate, leading to a required return less than 5%.

Assume That the Risk-Free Rate Is 5