If the CAPM Is Used to Estimate the Cost of Equity

question 63

Multiple Choice

If the CAPM is used to estimate the cost of equity capital,the expected excess market return is equal to the:

• A)return on the stock minus the risk-free rate.
• B)return on the market minus the risk-free rate.
• C)beta times the market risk premium.
• D)beta times the risk-free rate.
• E)market rate of return.

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Definitions:

Risk-Free Rate

The hypothetical return rate on an investment that carries no risk of losing money, commonly illustrated by the interest rate on government securities.

Multifactor Model

A financial model that employs multiple factors in its calculations to explain market phenomena and/or equilibrium asset prices.

Unanticipated Inflation

Inflation that occurs when the actual rate exceeds what was expected, potentially eroding purchasing power and investment returns.