Asked by Jonathan Conkle on May 27, 2024
Verified
The measure of risk used in the capital asset pricing model is ________.
A) specific risk
B) the standard deviation of returns
C) reinvestment risk
D) beta
Capital Asset Pricing Model
A model that describes the relationship between systematic risk and expected return for assets, particularly stocks; it is used to determine a theoretically appropriate required rate of return of an asset.
Specific Risk
Risk associated with individual investments or a small group of assets, distinct from market risk.
- Understand the significance of beta in evaluating the overall risk in financial markets.
Verified Answer
BG
Blessie Grace RosalMay 28, 2024
Final Answer :
D
Explanation :
The risk measure used in the capital asset pricing model is beta. Beta measures the systematic risk of an asset or portfolio relative to the market as a whole. It is a standardized measure that takes into account the volatility of the asset's returns and its correlation with the market. Therefore, option D is correct. The other options - specific risk, standard deviation of returns, and reinvestment risk - are not used in the capital asset pricing model as measures of risk.
Learning Objectives
- Understand the significance of beta in evaluating the overall risk in financial markets.