CAPM and the Characteristic Line. The Characteristic Line. Total risk of any asset can be assessed by measuring variability of its returns Total risk can be divided into two parts—diversifiable risk (unsystematic risk) and non-diversifiable risk (systematic risk)
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Stocks Expected Return Beta
A 16% 1.2
B 19% 1.3
C 13% 0.75
E(rm) = 18% rf = 14%
Which of these stocks is correctly priced?
E(ri) = 0.07 + 0.09I
What must be the returns for two stocks assuming their betas are 1.2 and 0.9?