Question: The CAPM includes several elements including the risk free rate, the market risk premium (which is the current required rate of return on an average

The CAPM includes several elements including the risk free rate, the market risk premium (which is the current required rate of return on an average portfolio of stocks less the risk free rate), and a beta coefficient, which measures the relative risk of a stock to the overall systematic or market risk of an average portfolio of stocks. If the ABC Company stock has a beta coefficient of 2.0 and the XYZ Company has a beta coefficient of 1.0, then we can conclude that investors in the ABC Company would require an investment return that is double the required return for investors in XYZ Company. (Hint: Look carefully at the CAPM equation before answering).

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