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The CAPM implies that investors require a higher return to hold highly volatile securities?
Wiki User
∙ 13y ago
The CAPM relates the expected return on a security to that of the overall market portfolio.
A highly volatile security will have a high covariance with the market portfolio. Since beta equals the covariance of the security with the market portfolio divided by the variance of the market portfolio, the result is a high value of beta.
When this high value of beta is plugged into the CAPM formula, all else not changed, the required return on the security (ra) is going to increase, implying investors require a higher return to hold a highly volatile security.
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∙ 13y ago
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