Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. 1) The higher the systematic risk of a company’s stock, the higher the value of its beta. The higher the beta, the higher the return required by the investors. (Explain your reasoning.)
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
EXERCISE 1
Indicate whether each of the following statements is true or false. Support your answers
with the relevant explanations.
1) The higher the systematic risk of a company’s stock, the higher the value of its
beta. The higher the beta, the higher the return required by the investors.
(Explain your reasoning.)
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