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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).