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6 Cards in this Set

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k = Rf + (Rm - Rf)B or
Rs = Rf + (Rm - Rf)B

What does this formula mean?
Beta and the security market line.

The required rate of return of a stock equals the risk-free rate of interest plus return on the market minus the risk-free rate of interst times the individual stock's beta, or systematic risk.
k = Rf + (Rm - Rf)B

What is "k"?
k = the required rate of return.

(or Rs = return on a stock)
k = Rf + (Rm - Rf)B

What is "Rf"?
Rf = risk-free rate of interest
k = Rf + (Rm - Rf)B

What is "Rm"?
Rm = return on the market
k = Rf + (Rm - Rf)B

What is "B"?
B = the individual stock's beta coefficient.

Beta Coefficient = an index of risk; a measure of the systematic risk associated with a particular stock.
Note: Beta's primary use in finance has been its incorporation into the Capital Asset Pricing Model (CAPM) as the key variable that explains individual securities.
Note: The relationship between risk, as measured by beta, and an asset's return is specified in the security market line (SML).