CAPM, Derivations and leverage

Short Exercise

1. Write down the CAPM formula.

CAPM describes the relationship between Systematic risk (non- diversifiable) risk and the
expected return of an asset particularly stock.

Ra = Rrf + b ( Rm – Rrf )

Ra = Expected rate of return

Rrf = Risk free rate

b = Beta of the security

Rm = Expected return of the market

2. In a recession economy price of the stock goes down. True

a) True
b) False

3. Forwards are non-standardized contracts. True

a) True
b) False

4. Futures are traded on a futures exchange. True

a) True
b) False

5. In a risk averse situation SML moves further steep. True

a) True
b) False