Which statement is false regarding the Capital Asset Pricing Model?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
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.
Question
Which statement is false regarding the Capital Asset Pricing Model ?
A. The beta coefficient of a stock is constant.
B. The risk free rate is usually based on the treasury bill yield.
C. Market risk premium is the difference between market return and the risk free rate.
D. The cost of retained earnings is equal to the cost of new shares issued.
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