Ch $03$: Assignment $-$ Risk and Return: Part II

$3.$ The basics of the Capital Asset Pricing Model

Which of the following are assumptions of the Capital Asset Pricing Model $($CAPM$)?$ Check all that apply.

Asset quantities are given and fixed.

Investors have homogeneous expectations.

Expected returns are based on individual investor risk sensitivity$.$

All investors focus on a single holding period.

Consider the equation for the Capital Asset Pricing Model $($CAPM$)$:

hat$(r{)}_i=r_{RF}+(hat(r{)}_M-r_{RF})\frac{\text{C}\text{o}\text{v}(r_i,r_M)}{{}_M^2}$

In this equation, the term $r_{RF}$ represents the

Suppose that the market's average excess return on stocks is $12\mathrm{.}00\%$ and that the risk$-$free rate is $2\mathrm{.}00\%.$ Complete the following table by computing expected returns to stocks for each beta coefficient using the Capital Asset Pricing Model $($CAPM$)$:

$\backslash$table$[[b_1,$ Expected Return to Stocks $(\%)],[-0\mathrm{.}30],[0\mathrm{.}50],[1\mathrm{.}00],[5\mathrm{.}00]]$

Based on the CAPM and your calculations for the return to stocks, what does it mean when the coefficient $b_i=1?$

All investors focus on a single holding period.

der the equation for the Capital Asset Pricing Model $($CAPM$)$:

$=r_{RF}+(hat(r{)}_M-r_{RF})\frac{\text{C}\text{o}\text{v}(r_i,r_M)}{{}_M^2}$

S equation, the term $r_{RF}$ represents the

pse that the market's average excess return on stocks is $12\mathrm{.}00\%$ and that the risk$-$free rate is $2\mathrm{.}00\%.$ Complete the following table by computing ted returns to stocks for each beta coefficient using the Capital Asset Pricing Model $($CAPM$)$:

Expected Return to Stocks $(\%)$

on the CAPM and your calculations for the return to stocks, what does it mean when the coefficient $b_i=1?$

The stock is less volatile than the market.

The stock's return correlates with the stock market as a whole.

The stock is more volatile than the market.

Grade it Ndin,