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22 July, 03:01

Which one of the following should earn the most risk premium based on CAPM?

A. diversified portfolio with returns similar to the overall market

B. stock with a beta of 1.38

C. stock with a beta of 0.74

D. U. S. Treasury bill

E. portfolio with a beta of 1.01

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Answers (1)
  1. 22 July, 04:13
    0
    The portfolio with a beta of 1.38 should earn the most risk premium based on CAPM.

    The correct answer is B

    Explanation:

    A diversified portfolio with returns similar to the overall market will not earn the most risk premium because its beta is equal to 1.

    A stock with a beta of 1.38 produces the most risk premium because any stock with the highest beta gives the highest risk-premium. This is the correct answer.

    A stock with a beta of 0.74 does not provide the highest risk premium.

    Us treasury bill does not provide any risk premium since it is the risk-free rate.

    A portfolio with a beta of 1.01 does not produce the highest risk premium.
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