Both the CAPM and APT Suggest That an Asset Should

question 38

Multiple Choice

Both the CAPM and APT suggest that an asset should be priced so that it has a higher expected return

• A)when it has a greater systematic risk.
• B)when it has a greater risk in isolation.
• C)when it has a lower systematic risk.
• D)when it has a lower systematic risk and a lower risk in isolation.

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Definitions:

Income Stream

A series of regular payments or revenues generated over time from investments, work, or business activities.

Dividend Preference Theory

A theory suggesting that investors prefer dividends from current earnings over potential capital gains because of the perceived certainty of dividend payments.

Bird in Hand

A theory in finance that suggests investors prefer the certainty of dividend payments to the potential for future capital gains.

PE Ratio

The Price to Earnings Ratio, a metric used to evaluate the valuation of a stock by dividing its current share price by its earnings per share.