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The Risk-Return Relationship and Stock Prices

Published online by Cambridge University Press:  06 April 2009

Benjamin Bachrach  and
Dan Galai
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Extract

According to the current state of knowledge in finance, the expected rate of return adjusted for risk is independent of the stock price. The basic proposition of the capital asset pricing model (CAPM) is that the expected rate of return for each security is a function of the “risk” of that security, and that this risk is measured by the contribution of the security to the variability of the market portfolio. The implication of the CAPM is that knowing the price of a security perse will add nothing to predicting its expected rate of return.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 2 , June 1979 , pp. 421 - 441
Copyright
Copyright © School of Business Administration, University of Washington 1979

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References

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