CAF-7 · Chapter 9 · Question 12 of 15
According to the Capital Asset Pricing Model (CAPM), what happens to a company's Cost of Equity if the Beta of its shares increases from 1.0 to 1.3?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The Cost of Equity will increase because investors will demand a higher return for the increased systematic risk
Explanation
Beta measures systematic risk. A beta of 1.3 means the stock is 30% more volatile than the market average. Under CAPM, as risk (Beta) goes up, the required return (Cost of Equity) goes up to compensate investors.
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