Answer: 2 percentage points extra return.

## Explanation The beta coefficient in the Capital Asset Pricing Model (CAPM) measures the sensitivity of a stock's returns to changes in the market returns. - A beta of 1 indicates that the stock's price will move with the market - A beta less than 1 indicates that the stock will be less volatile than the market - A beta greater than 1 indicates that the stock will be more volatile than the market In this case, a beta of 2 means that the stock is expected to return **twice** the market's excess return over the risk-free rate. Therefore, for every percentage point performance attained by the market over above the risk-free rate, we would expect the stock to achieve **2 percentage points extra return**. ### Why other options are incorrect: - **Choice A**: A beta value of 2 indicates that the stock's return is expected to change by 2 percentage points for every percentage point change in the market, not just 1 percentage point. - **Choice C**: The beta value does not indicate a lower return but rather a higher sensitivity to market movements. A beta of 2 suggests that the stock's return would increase or decrease by twice as much as any given market movement. - **Choice D**: The CAPM model and its use of beta provide a clear method for estimating expected returns based on market performance and risk relative to the market, making it possible to determine an expected response.

Author: Tanishq Prabhu