Assume the CAPM Is the Correct Asset Pricing Model $0.150$

question 14

Multiple Choice

Assume the CAPM is the correct asset pricing model.An asset has a standard deviation of 40% and the market has a standard deviation of 15%.What would the correlation of the asset with the market need to be if the asset were to have the same expected return as the market?

• A) \( 0.150 \)
• B) \( 0.375 \)
• C) \( 0.600 \)
• D) \( 0.667 \)

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Definitions:

Internal Rate of Return

A financial metric used to gauge the profitability of potential investments.

NPV

An evaluation metric used to estimate the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.

Capital Budgeting Analysis

The process of evaluating and selecting long-term investments that are in line with the goal of shareholder wealth maximization.

Payback

A capital budgeting method that calculates the length of time required to recoup the original investment.