Skip to content

ACCA Applied Skills · Financial Management · Estimating the cost of capital

Which of the following statements about the capital asset pricing model is correct?

A share with a beta of 1.5 is more volatile than the market, so CAPM requires a return above the market return. Beta captures only systematic risk, unsystematic risk is diversifiable and unrewarded, and zero beta gives the risk-free return.

  1. ABeta measures the total risk of a share, including both systematic and unsystematic risk.
  2. BA share with a beta of 1.5 is expected to have returns that are more volatile than the market, so it needs a higher return than the market.Correct
  3. CUnsystematic risk is rewarded in the required return because it cannot be diversified away.
  4. DA beta of zero means the investor requires a return equal to the market return.

Explanation

Beta measures systematic risk only. A beta above 1 means the share is more volatile than the market, so CAPM gives a required return above the market return. A beta of zero gives the risk-free rate, not the market return, and unsystematic risk can be diversified and is not rewarded.

Did you get it right without looking?

One question tells you little. A timed set on Estimating the cost of capital shows your real accuracy, how long you take and where you lose marks.

Practise Estimating the cost of capitalFree diagnostic mock

More Estimating the cost of capital questions