According to the capital asset pricing model, which of the following will increa

Question

According to the capital asset pricing model, which of the following will increase the expected rate of return on a security that has a beta that is less than that of the market? Assume the market rate of return is greater than the risk-free rate and both rates are positive. (Which ines apply)

I. decrease in the risk-free rate
II. increase in the risk-free rate
III. increase in the market risk premium
IV. decrease in the market rate of return

Answer choices:

II and III only
II and IV only
I and III only
II, III, and IV only
I and IV only

Explanation / Answer

Ans) Expected Rate of return = Risk free rate of return + Beta*(Market rate return - Risk free rate of return)

So market premium(B*(Rm - RF) increaes then expected rate return will increase and if risk free rate increase compare to its decrease effect , its increase effect is more so, the expected return will increase ,

So option 1 i,e II and III only

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