Question #54
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 21
Status: Correct
Correct Answer: B
Question
In using the capital asset pricing model (CAPM) to determine the appropriate discount rate for discounted cash flow models (DCFs), the asset's beta is used to determine the amount of:
Answer Choices:
A. risk-free rate applicable to the time period of the investment
B. equity premium
C. the expected return in addition to the return required by the risk of the position
Explanation
Beta measures the correlation between the equity market or index for which the market
risk premium is calculated and the particular asset being valued. Beta is used to
approximate the proportion of the equity risk premium applicable to the asset (in relation
to the market or index used).