According to the capital-asset pricing model (CAPM), a security's expected (required) return is equal to the risk-free rate plus a premium:
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A. B. C. D.D
The Capital Asset Pricing Model (CAPM) is a financial model that helps investors and analysts understand how to calculate the expected return on an investment based on its risk. According to the CAPM, a security's expected return is equal to the risk-free rate plus a premium. The risk-free rate is the rate of return an investor would earn on a riskless investment such as a government bond, while the premium represents the additional return that an investor expects to receive for taking on additional risk.
The premium is based on the systematic risk of the security, which is the risk that cannot be diversified away by investing in a portfolio of assets. The systematic risk is also known as market risk, and it is caused by factors that affect the entire market, such as changes in interest rates, inflation, or geopolitical events.
The CAPM also takes into account the beta of the security, which measures the sensitivity of the security's returns to changes in the market. A security with a beta of 1 has the same level of systematic risk as the market as a whole, while a security with a beta greater than 1 is more sensitive to market changes, and a security with a beta less than 1 is less sensitive to market changes.
However, the expected return on a security is not equal to its beta. The beta only helps to determine the premium that investors demand for taking on systematic risk. The expected return is based on the risk-free rate plus the premium, which is based on the systematic risk of the security.
Therefore, the correct answer to the question is D. The expected (required) return of a security based on the CAPM is based on the systematic risk of the security.