According to the CAPM, the expected return on a stock, that is part of a portfolio, will depend on all of the following except:

By Investopedia AAA
A:

A. the covariance between the stock and the market.

B. the variance of the market.

C. the market risk premium.

D. the stock's correlation with the other securities in the portfolio.


The general idea behind capital asset pricing model (CAPM) is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf). Beta is the the covariance between the stock and the market divided by the variance of the market.

Correct answer: D. the stock's correlation with the other securities in the portfolio.

RELATED FAQS

  1. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ...
  2. What are the main risks of after-hours trading?

    Trading outside of traditional stock market hours brings some unique risks that you should be aware of.
  3. What is the difference between positive and normative economics?

    Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic ...
  4. What is the difference between investing and trading?

    Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing ...
RELATED TERMS
  1. Policyholder Surplus

    The assets of a mutual insurance company minus its liabilities. ...
  2. Net Premium

    The expected present value of a policy’s benefits less the expected ...
  3. Quick Liquidity Ratio

    The total amount of a company’s quick assets divided by the sum ...
  4. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  5. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  6. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all ...
comments powered by Disqus
Related Articles
  1. Another Sound Lesson In Risk Management
    Investing News

    Another Sound Lesson In Risk Management

  2. Choosing The Right ETF Index To Reach ...
    Investing News

    Choosing The Right ETF Index To Reach ...

  3. Using Normal Distribution Formula To ...
    Investing Basics

    Using Normal Distribution Formula To ...

  4. Human Capital, An Important Asset For ...
    Investing Basics

    Human Capital, An Important Asset For ...

  5. The Government And Risk: A Love-Hate ...
    Insurance

    The Government And Risk: A Love-Hate ...

Trading Center