Question

The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :a. prevailing level of the industry competition.b. beta.

Answer 1

Answer:

The question is not complete:

The capital asset pricing model (CAPM) suggests that the required rate of return on a stock is directly influenced by the stock's :a.prevailing level of the industry competition.b.beta.c.liquidity.d.size (market capitalization).

The correct option is B,beta

Explanation:

The formula for determining return on an investment using CAPM approach is given below;

expected return=risk free rate+beta*(market premium)

The CAPM determines return based on the level of risk involved in the investment, that is the beta.

This is true because the risk free rate which is the return on government securities is the same for all investments,as a result difference that distinguishes one investment's return from the other is risk to be taken by investor which is beta factor.

Answer 2

Answer:

The correct answer is letter "B": beta.

Explanation:

While talking about the stock market, Beta (β) is a coefficient that measures the performance of a stock. It ranges from (-1) to (1). A negative beta implies the stock moves in the opposite way of the market. If the stock market is uptrending a negative-beta stock will be underperforming. A positive beta implies that the stock is highly related to the market movements. If the stock market is uptrending, so will a positive-beta stock. When a stock has a value of zero (0), it implies it does not follow any trend of the market.

The Capital Asset Pricing Model (CAPM) uses beta to measure the volatility of the stock. The CAPM of an investment is calculated using the following formula:

$ER_{i} = R_{f} + \beta _{i} (ER_{m}-R_{f} )$

Where:

• $ER_{i}$= expected return of investment
• $R_{f}$= risk-free rate
• $\beta _{i}$= beta of the investment
• $(ER_{m}-R_{f} )$= market risk premium