Explanation:
High betas imply high risk premiums. In the context of both the Capital Asset Pricing Model (CAPM) and multifactor models, beta is a measure of an asset's sensitivity to changes in the market. A high beta indicates that the asset's returns are highly sensitive to market changes. This means that when the market performs poorly, the asset is likely to perform poorly as well. This high sensitivity to market changes, or high beta, implies a high level of risk. Investors require compensation for bearing this risk, which is provided in the form of a risk premium. Therefore, assets with high betas are expected to offer high risk premiums to compensate investors for the increased risk they are taking on by investing in these assets.
Choice A is incorrect. Low betas do not imply high risk premiums. In the context of CAPM and multifactor models, a low beta indicates that the asset's returns are less sensitive to changes in the market. This implies a lower level of systematic risk and therefore, typically corresponds to a lower risk premium.
Choice B is incorrect. High betas do not imply low risk premiums. On the contrary, high betas indicate that an asset's returns are highly sensitive to changes in the market, implying a higher level of systematic risk. As such, investors would require a higher risk premium as compensation for bearing this increased level of risk.
Choice D is incorrect. The statement "None of the above" is inaccurate because Choice C correctly states that high betas imply high risk premiums which aligns with both CAPM and multifactor models' interpretation of factor betas and their relationship with risk premiums.
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Q.4592 In both CAPM and multifactor models, the risk is measured by factor betas. Which of the following is most likely true about factor betas and risk premiums?
A
Low betas imply high risk premiums
B
High betas imply low risk premiums
C
High betas imply high risk premiums
D
None of the above