You are required to comment: (b) What would happen if the correlation co-efficient were less?

CS Professional · Financial, Treasury and Forex Management · PYQS · December 2021
You are required to comment: (b) What would happen if the correlation co-efficient were less?

Answer & Explanation:

If the correlation coefficient (ρjm) between the security and the market portfolio were less, holding other factors constant, the Beta (βj) of the security would decrease. A lower Beta implies that the security's returns move less in tandem with the market. Consequently, a lower Beta would lead to a lower required return for the security.

Topics: Capital Asset Pricing Model (CAPM)

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