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 riskfree (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 (Rmrf). 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.

What is the difference between variance and covariance?
Learn more about the differences between covariance and variance, and how these metrics can be of use to you in minimizing ... Read Answer >> 
Can a mean variance analysis be done for any investment?
Learn how mean variance analysis is used in modern portfolio theory to create an optimal mix of assets to maximize return ... Read Answer >> 
How can I measure portfolio variance?
Find out more about portfolio variance, the formula to calculate portfolio variance and how to calculate the variance of ... Read Answer >> 
What is the formula for calculating the capital asset pricing model (CAPM)?
Learn about the capital asset pricing model, or CAPM, and how this formula is used to determine the expected rate of return ... Read Answer >> 
How is covariance used in portfolio theory?
Learn how covariance is used to reduce risk in modern portfolio theory, how covariance is calculated and how it is used to ... Read Answer >> 
How does covariance impact portfolio risk and return?
Understand how covariance is related to the risk and return of a portfolio of stocks, and learn how covariance is used to ... Read Answer >>

Investing
The Capital Asset Pricing Model: an Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Investing
Calculating Portfolio Variance
Portfolio variance is a measure of a portfolioâ€™s volatility, and is a function of two variables. 
Investing
What is Covariance?
Covariance is a concept used in statistics and probability theory to describe how two variables change when compared to one another. In business and investing, covariance is used to determine ... 
Investing
Valuation Models: Appleâ€™s Stock Analysis With CAPM
The capital asset pricing model, or the CAPM, estimates the expected return of an asset based on the systematic risk of the assetâ€™s return. 
Investing
Calculating Covariance For Stocks
Learn how to figure out how two stocks might move together in the future by calculating covariance. 
Investing
Capital Asset Pricing Model  CAPM
CAPM is a model that describes the relationship between risk and expected return. 
Investing
The Capital Asset Pricing (CAPM) Model: Pros and Cons
CAPM, while criticized for its unrealistic assumptions, provides a more useful outcome than either the DDM or WACC in many situations. 
Investing
Is Apple's Stock Over Valued Or Undervalued?
Despite several drawbacks, the CAPM gives an overview of the level of return that investors should expect for bearing only systematic risk. Applying Apple, we get annual expected return of about ... 
Investing
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. 
Tech
CAPM vs. Arbitrage Pricing Theory: How They Differ
Both project the expected rate of return given the level of risk assumed, but they consider different variables.

Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Portfolio Variance
The measurement of how the actual returns of a group of securities ... 
International Capital Asset Pricing Model (CAPM)
A financial model that extends the concept of the capital asset ... 
Market Risk Premium
The difference between the expected return on a market portfolio ... 
Covariance
A measure of the degree to which returns on two risky assets ... 
Variance
The spread between numbers in a data set, measuring Variance ...