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true or false Suppose the CAPM holds
true or false Suppose the CAPM holds. Suppose security X has a beta of 2 while security Y has a beta of 1. Then, assuming that the market risk premium (E(Rm) − rf ) is positive, X should have a higher expected return than Y.
Expert Solution
ANS: TRUE
As per CAPM (Capital Assets Pricing Model)
Expected Return (ke) = Risk free rate (Rf) + Beta* (market return (Rm) - Rf)
Rm - Rf is also called as Market Risk Premium
In the Instant case,
Beta of Security X = 2
Beta of Security Y = 1
High Beta represents Higher risk & Higher return potential, Whereas Lower Beta represents lower risk but also lower return.
Thus, Security X has higher Beta than Security Y, so, Security X has higher risk & higher return potential than Security Y.
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