As per CAPM model, the required rate of return on a security is:

Correct option is A

Introduction:

According to the Capital Asset Pricing Model (CAPM), the required rate of return on a security is calculated as the risk-free rate (often proxied by return on Treasury Bonds or Government Securities) plus the market risk premium adjusted by the security’s beta. The formula is:

Required Return = R_f + β(R_m - R_f)

Where:

​R_f  = Risk-free rate (return on Treasury Bonds or Government Securities)

​β = Measure of the security's systematic risk relative to the market

​R_m - R_f  ​= Market risk premium (excess return expected from the market over the risk-free rate)

This model assumes that only systematic risk (market risk measured by beta) is rewarded, while unsystematic risk is diversified away and hence not priced.

Information Booster:

• CAPM is a widely used model in finance to estimate the expected return on an asset based on its risk relative to the market.

• The risk-free rate is usually represented by the yield on government securities like Treasury Bonds because they are considered virtually risk-free.

• The market risk premium represents the additional return investors require to compensate for market risk.

• Beta measures a security’s sensitivity to market movements; a beta >1 means more volatile than market, <1 means less volatile.

• CAPM helps in portfolio management, capital budgeting, and performance evaluation.

• It assumes markets are efficient and investors are rational.

• CAPM ignores unsystematic risk because it can be eliminated by diversification.

  Additional Knowledge:

(b) Return on individual securities + Beta Premium:Incorrect because CAPM does not add a “beta premium” to an individual security's return directly. Beta multiplies the market risk premium, not an isolated “beta premium.” Also, “return on individual securities” is not a base rate in CAPM.

(c) Return on Government Securities + Unsystematic Risk Premium:
Incorrect because unsystematic risk is not priced in CAPM since it is diversifiable. Only systematic risk is rewarded.

(d) Return on Corporate Securities + Systematic Risk Premium:
Incorrect because CAPM uses the risk-free rate (government securities) as the base, not return on corporate securities, which carry additional risks.