Which of the following is consistent with the CAPM and efficient capital markets? A) A security with a beta of 1 has a return last year of 8% when the market has a return of 12%. B) Small stocks with a beta of 1.5 tend to have higher returns on average than large stocks with a beta of 1.5. C) A security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. D) A security with only systematic risk has an expected return that exceeds the risk-free interest rate.

Question

Michaela Solis

Business

7 May, 13:00

Which of the following is consistent with the CAPM and efficient capital markets? A) A security with a beta of 1 has a return last year of 8% when the market has a return of 12%. B) Small stocks with a beta of 1.5 tend to have higher returns on average than large stocks with a beta of 1.5. C) A security with only diversifiable risk has an expected return that exceeds the risk-free interest rate. D) A security with only systematic risk has an expected return that exceeds the risk-free interest rate.

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Sophia Acevedo · Answer 1

A security with a beta of 1 has a return last year of 8% when the market has a return of 12%.

Answer: Option A

Explanation:

In a market of the capitals, the return that a person will get from the security will depend upon the risk that has been associated with that security. The CAPM says that the return of the security that a person will get depend upon the beta of the security. Here beta is the measure with which we can measure the risk of the security. It is an absolutely correct measure of the security risk.