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(CAPM Redux] As you have learned in Class 10 (and also in finance class), the capital asset pricing model (CAPM) determines the relationship between market
(CAPM Redux] As you have learned in Class 10 (and also in finance class), the capital asset pricing model (CAPM) determines the relationship between market returns and the returns of an individual stock. One widely used version of the CAPM model (as we learned in class) is as follows: Risk premium of a stock = Pintercept + B. Market risk premium + Risk premium of a stock: the risk-free rate adjusted return of the stock (It is the cost of capital minus the risk-free rate). Market risk premium: the risk-free rate adjusted return of the market (e.g., S&P 500). The slope of the regression line, B1 is the relative volatility (beta), a measure of sensitivity of the return of an individual asset with respect to the market return. Stocks with higher beta's (e.g., B1 > 1) are considered to be riskier than stocks with lower betas (e.g., B1 1) are considered to be riskier than stocks with lower betas (e.g., B1
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