The general purpose of the CAPM is to try and equate a stock's beta to its perceived level of risk

Finance Oct 24, 2020

The general purpose of the CAPM is to try and equate a stock's beta to its perceived level of risk.

Group of answer choices

True

False

Expert Solution

As per CAPM Model,

Required Rate = R_f + Beta(R_m - R_f)

Here,

R_f = Risk-free Rate

R_m = Expected Market Return

Capital Asset Pricing Model (CAPM) is a model describing the relationship between the risk and the expected return of an asset. Beta represents non-diversifiable risk or systematic risk.

Hence the purpose of CAPM is to try and equal a stock's required return to its perceived level of risk not beta to its perceived level of risk.

The above statement is "False".

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