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The CAPM Computes Expected Rates of Return on Common Equity

Question 4

Essay

The CAPM computes expected rates of return on common equity capital using the following model:
E[REj] = E[RF] + b j x {E[RM] - E[RF]}
What are the roles of each of the three components of this model?

Correct Answer:

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The first component (E[RF]) represents th...

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