The Capital Asset Pricing Model Implies That the Only Factors

question 29

True/False

The capital asset pricing model implies that the only factors that determine the required rate of return on a stock are the amount of market risk the stock is exposed to and the expected return in the market.

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Definitions:

Arbitrage Opportunity

A situation where a trader can make a profit from the price difference of an asset in different markets or forms without taking significant risk.

Risk-free Rate

The theoretical return of an investment with zero risk, often represented by the yield on government bonds.

Beta

A measure of a stock's volatility in relation to the overall market; a beta above 1 indicates greater volatility than the market, while a beta below 1 suggests less.

Average Returns

The arithmetic mean of the historical returns of an investment, often used as a general indication of its past performance.