Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

According to the Capital Asset Pricing Model (CAPM), which of the following best explains the expected return on a security?

It is based solely on the company's dividend growth rate.

It is equal to the risk-free rate regardless of the security's risk.

It is determined by the security's total risk, including both systematic and unsystematic risk.

It is determined by the risk-free rate plus the security's beta times the market risk premium.

Previous problemNext problem

Verified step by step guidance

Understand the Capital Asset Pricing Model (CAPM): The CAPM is a financial model used to determine the expected return on an investment based on its risk relative to the market. It assumes that investors are compensated for both the time value of money (risk-free rate) and the risk they take (market risk premium).

Identify the formula for CAPM: The expected return on a security is calculated using the formula: E(R) = Rf + β × (Rm - Rf), where E(R) is the expected return, Rf is the risk-free rate, β (beta) is the measure of the security's sensitivity to market movements, and (Rm - Rf) is the market risk premium.

Break down the components: The risk-free rate (Rf) represents the return on a risk-free investment, such as government bonds. Beta (β) measures the security's volatility relative to the market. The market risk premium (Rm - Rf) is the additional return expected from the market above the risk-free rate.

Clarify the role of systematic and unsystematic risk: CAPM focuses only on systematic risk (market-related risk) because unsystematic risk (company-specific risk) can be diversified away in a well-diversified portfolio. Therefore, the expected return is not determined by total risk but by systematic risk.

Conclude the explanation: The expected return on a security, according to CAPM, is determined by the risk-free rate plus the product of the security's beta and the market risk premium. This aligns with the correct answer provided in the problem.