Answer (B) is correct . The required rate of return on equity capital in the capital asset pricing model is the risk-free rate (determined by government securities), plus the product of the market risk premium times the beta coefficient (beta measures the firm’s risk). The market risk premium is the amount above the risk-free rate that will induce investment in the market. The beta coefficient of an individual stock is the correlation between the volatility (price variation) of the stock market and that of the price of the individual stock. For example, if an individual stock goes up 15% and the market only 10%, beta is 1.5.
Answer (A) is incorrect because The coefficient of variation compares risk with expected return (standard deviation ¡Â expected return).
Answer (C) is incorrect because Standard deviation measures dispersion (risk) of project returns.
Answer (D) is incorrect because Expected return does not describe risk. |
