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Eduncle posted an MCQ
October 16, 2019 • 22:47 pm 0 points
  • UGC NET
  • Management

The following two statements relate to Capital Asset Pricing Model. Choose the correct code for the statements being correct or incorrect.

The following two statements relate to Capital Asset Pricing Model. Choose the correct code for the statements being correct or incorrect. Statement I : Beta is a measure of a security's risk relative to the risk of the market portfolio. Statement II : The value of Beta measures both the systematic and the unsystematic risks of a security.

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    Eduncle Best Answer

    1. CAPM : The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security. 
    2. Beta : The beta (denoted as "Ba" in the CAPM formula) is a measure of a stock's risk (volatility of returns) reflected by measuring the fluctuation of its price changes relative to the overall market. In other words, it is the stock's sensitivity to market risk. For instance, if a company's beta is equal to 1.5, the security has 150% of the volatility of the market average. However, if the beta is equal to 1, the expected return on a security is equal to the average market return.  A beta of -1 means security has a perfect negative correlation with the market.
    Beta measures the fluctuation of the company share with the market changes for years i.e. performance of the company share price with the market conditions.
    It means beta measures the systematic risk of the market.
    Statement I is correct.
    Statement II is incorrect.

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