$3.$ The basics of the Capital Asset Pricing Model

Which of the following are assumptions of the Capital Asset Pricing Model $($CAPM$)?$ Check all that apply.

Taxes are accounted for.

Investors can borrow an unlimited amount at a risk$-$free rate.

There are no transaction costs.

Investors assume that their investment activities won$$t affect the price of a stock.

Consider the equation for the Capital Asset Pricing Model $($CAPM$)$:

r$$i

$=$

rRF $+($r$$M $$ rRF$)$

$\backslash$times

Cov$($ri$,$ rM$)\backslash$sigma $2$M

In this equation, the term $($r$$M $$ rRF$)$

represents the $.$

Suppose that the market$$s average excess return on stocks is $12\mathrm{.}00\%$ and that the risk$-$free rate is $3\mathrm{.}00\%.$ Complete the following table by computing expected returns to stocks for each beta coefficient using the Capital Asset Pricing Model $($CAPM$)$:

bi

Expected Return to Stocks $(\%)$

$0\mathrm{.}70$

$0\mathrm{.}20$

$1\mathrm{.}00$

$2\mathrm{.}00$

Based on the CAPM and your calculations for the return to stocks, what does it mean when the coefficient bi

$=1?$

The stock is less volatile than the market.

The stock is more volatile than the market.

The stock$$s return correlates with the stock market as a whole.