Which of the Following Best Describes the Capital Asset Pricing

question 6

Multiple Choice

Which of the following best describes the capital asset pricing model?

• A) Determines the amount of capital that is needed in particular situations
• B) Is used to determine the price of futures contracts
• C) Relates the return on an asset to the return on a stock index
• D) Is used to determine the volatility of a stock index

Appreciate the role of debt and equity in affecting a firm's cost of capital.

Recognize how the firm's investment decisions are influenced by the NPV and cost of capital.

Understand the impact of risk on the cost of capital components and the overall WACC.

Understand the relationship between the returns required by investors and the firm's cost of capital components.

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Definitions:

Smaller Population

A subgroup or a section of a larger group or population, particularly one that is less in number.

Sampling Error

The difference between sample and population values.

Average Score

The arithmetic mean calculated by dividing the sum of scores by the number of scores.

Correlation

A statistical measure that describes the degree to which two variables move in relation to each other.