Manag., November-2017 – Q18
0. Capital Asset Pricing Model (CAPM) for risk measurement has been given by :
- Option : C
- Explanation : CAPM (Capital Asset Pricing Model) is one of the most popular models in the finance industry. It is required to determine a theoretically estimated required rate of return of an asset. The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systematic or market risk), often represented by quantity beta in the financial industry as well as the expected rate of return of the market and expected to return of a theoretical risk-free asset. This model was introduced by Treynor, Sharpe, Lintner, and Mossin independently building on the earlier work of Markowitz on diversification and modern portfolio theory. The model has contributed a lot to the development in the field of finance by providing the estimations of return of different assets based on statistical data and certain indicators. For individual securities, we make use of the security market line (SML) and its relation to expected return and systematic risk (beta) to show how the market must price individual securities in relation to their security risk class.
