Which model is used to estimate the required rate of return for an asset based on its systematic risk relative to the market?
ADividend Discount Model (DDM)
BArbitrage Pricing Theory (APT)
CCapital Asset Pricing Model (CAPM)
DGordon Growth Model
Explanation
* Capital Asset Pricing Model (CAPM) formula: E(Ri) = Rf + beta * (E(Rm) – Rf).
* Beta measures systematic risk relative to the broader market portfolio.
* The model assumes investors hold diversified portfolios, eliminating unsystematic risk.
Exam Relevance
- Topic: Corporate Finance
- Subtopic: Risk and Return
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