Exam 2: Risk and Return: Part I

key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio The risk of the asset held in isolation is not relevant under the CAPM.

you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

Which of the following statements is CORRECT?

is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5% The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00% Based on the SML, what is the firm's required return?