Capital Asset Pricing Model (CAPM): Definition, Formula, Advantages & Example


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Which of the following is true of the beta coefficient?

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1. Willy's Motor Company, with a beta coefficient of 1.34, is which kind of investment relative to the market average?

2. Grab a calculator and let's use the CAPM. If the risk-free rate (as reflected by Company X returns) is 0.10, the average market return (as indicated by the 1-year return on Company Z) is 20.63, and Pear Products has a beta coefficient of 0.74, the appropriate required return for Pear Products (rounded to two decimal places) is:

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About This Quiz & Worksheet

Show what you know about the capital asset pricing model (CAPM) by passing this multiple-choice quiz. The questions will cover topics such as the assumptions, use and formula of the model.

Quiz & Worksheet Goals

Test yourself on the following with these study tools:

  • The beta coefficient and what it indicates about risk
  • Using the CAPM formula
  • The nine assumptions of the CAPM
  • Benefits of the CAPM

Skills Practiced

Taking the quiz may help you develop the following skills:

  • Defining key concepts - ensure that you can accurately define main phrases, such as beta coefficient
  • Reading comprehension - ensure that you draw the most important information from the related lesson on the capital asset pricing model
  • Problem solving - use the CAPM formula to solve practice problems
  • Knowledge application - use your knowledge to answer questions about the CAPM's assumptions

Additional Learning

To learn more about the CAPM, review the corresponding lesson called Capital Asset Pricing Model (CAPM): Definition, Formula, Advantages & Examples. This lesson covers the following objectives:

  • Understand the practical and theoretical use of the CAPM
  • Examine examples of the CAPM formula in use
  • Know what a risk-free rate is
  • Review the advantages of the CAPM