Ch.10 · Benchmarks and Performance Evaluation · hard
What does the Capital Asset Pricing Model (CAPM) state about expected returns?
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EXPLANATION
CAPM states: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate). The market risk premium (Market Return - Risk-Free Rate) compensates investors for bearing systematic risk. Beta scales this premium based on the portfolio's systematic risk. CAPM is used to assess whether a fund's actual return justifies the systematic risk taken.
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