Which of the following statements is INCORRECT according to CAPM:

Which of the following statements is INCORRECT according to CAPM:
A . expected returns on an asset will equal the risk free rate plus a compensation for the additional risk measured by the beta of the asset
B . the return expected by investors for holding the risky asset is a function of the covariance of the risky asset to the market portfolio
C . securities with a higher standard deviation of returns will have a higher expected return
D . portfolios on the efficient frontier have different Sharpe ratios

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Answer: C

Explanation:

The return on an asset is a function of the covariance of the asset’s return to the returns of the market portfolio. They do not depend upon the standard deviation of the asset itself. Therefore Choice ‘b’ is correct and Choice ‘c’ is incorrect.

The expected returns on an asset are equal to the risk free rate plus the beta times the market risk premium, therefore Choice ‘a’ is correct.

Portfolios on the efficient frontier will all have a different Sharpe ratio, which is the ratio of excess returns to portfolio volatility.

Choice ‘c’ is the correct answer (note that the question is asking for an identification of the INCORRECT statement).