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.

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 >> 
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 >> 
What types of assets lower portfolio variance?
Learn what type of assets reduce portfolio variance and how modern portfolio theory uses correlation coefficients. Read Answer >> 
What is the formula for calculating beta?
Find out more about beta, what a stock's or portfolio's beta measures, and learn how to calculate a security's or portfolio's ... Read Answer >> 
How is the Capital Asset Pricing Model (CAPM) represented in the Security Market ...
Learn about the capital asset pricing model and the security market line and how the model is used in the calculation and ... Read Answer >> 
How accurate is the equity risk premium in evaluating a stock?
Learn about the drawbacks of using the equity risk premium to evaluate a stock, and understand how it is calculated using ... Read Answer >>

Investing
Calculating Portfolio Variance
Portfolio variance is a measure of a portfolioâ€™s volatility, and is a function of two variables. 
Investing
The Capital Asset Pricing Model: an Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Investing
Calculating Covariance for Stocks
Learn how to figure out how two stocks might move together in the future by calculating covariance. 
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
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
How AQR Places Bets Against Beta
Learn how the bet against beta strategy is used by a large hedge fund to profit from a pricing anomaly in the stock market caused by high stock prices. 
Investing
Introduction To International CAPM
ICAPM is one of several models used to determine the required return on an asset, discover its limitations and how to use it.

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 ... 
Covariance
A measure of the degree to which returns on two risky assets ... 
Market Risk Premium
The difference between the expected return on a market portfolio ... 
MeanVariance Analysis
The process of weighing risk against expected return. Mean variance ... 
International Beta
Better known as "global beta", international beta is a measure ...