Wealth Management Essentials – Canada – Financial Planning, Investment Strategies and
Canadian Taxation Study Guide
What is beta? - ANS ✔✔Beta is a measure of the volatility, or systematic risk, of a security or a
portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model
(CAPM), a model that calculates the expected return of an asset based on its beta and expected
market returns. Also known as "beta coefficient."
Beta is the risk of an individual security relative to the market. A beta of 2 would be twice as
risky as the market. In practice, risk is synonymous with volatility. A stock with a beta larger than
the market beta of 1 will generally see a greater increase than the market when the market is
up and see a greater decrease than the market when the market is down.
What is CAPM? - ANS ✔✔'Capital Asset Pricing Model - CAPM'
A model that describes the relationship between risk and expected return and that is used in
the pricing of risky securities. The general idea behind CAPM is that investors need to be
compensated in two ways: time value of money and risk.
What is the formula and calculation for Capital Asset Pricing Model (CAPM)? - ANS ✔✔CAPM
Formula
Expected return= Rf + B(Rm-Rf)
Rf= Risk free
B= Beta
Rm = expected market return
The capital asset pricing model provides a formula that calculates the expected return on a
security based on its level of risk. The formula for the capital asset pricing model is the risk free
rate plus beta times the difference of the return on the market and the risk free rate.
Using the CAPM model and the following assumptions, we can compute the expected return of
a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2
and the expected market return over the period is 10%, the stock is expected to return 17% =3%
+2(10%-3%).
Canadian Taxation Study Guide
What is beta? - ANS ✔✔Beta is a measure of the volatility, or systematic risk, of a security or a
portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model
(CAPM), a model that calculates the expected return of an asset based on its beta and expected
market returns. Also known as "beta coefficient."
Beta is the risk of an individual security relative to the market. A beta of 2 would be twice as
risky as the market. In practice, risk is synonymous with volatility. A stock with a beta larger than
the market beta of 1 will generally see a greater increase than the market when the market is
up and see a greater decrease than the market when the market is down.
What is CAPM? - ANS ✔✔'Capital Asset Pricing Model - CAPM'
A model that describes the relationship between risk and expected return and that is used in
the pricing of risky securities. The general idea behind CAPM is that investors need to be
compensated in two ways: time value of money and risk.
What is the formula and calculation for Capital Asset Pricing Model (CAPM)? - ANS ✔✔CAPM
Formula
Expected return= Rf + B(Rm-Rf)
Rf= Risk free
B= Beta
Rm = expected market return
The capital asset pricing model provides a formula that calculates the expected return on a
security based on its level of risk. The formula for the capital asset pricing model is the risk free
rate plus beta times the difference of the return on the market and the risk free rate.
Using the CAPM model and the following assumptions, we can compute the expected return of
a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2
and the expected market return over the period is 10%, the stock is expected to return 17% =3%
+2(10%-3%).
