Firms with lower investment rates tend to

Question

BlackTom AI · Accepted Answer

E[R] = Rf + β(E[Rm] − Rf), so a higher CAPM β implies a higher expected return for a given market premium.

Relevant concepts:
- CAPM: expected return on an asset equals the risk-free rate plus beta times the market risk premium. Beta measures systematic (market) risk.
- Investment rate: the fraction of cash flows a firm reinvests; firms with lower investment rates typically return more cash to shareholders and have different risk profiles than high-investment firms.
- Empirical regularities: firms that invest less often exhibit characteristics (higher payout, sensitivity to market cycles) that can raise their systematic risk.

Step-by-step reasoning:
1. Define lower investment firms: they reinvest less of earnings, often paying higher dividends or buybacks and being more dependent on existing cash flows.
2. Link to systematic risk: such firms frequently have cash flows that are more exposed to aggregate economic conditions (cyclical revenues, commodity sensitivity, or concentrated business lines). That makes their returns move more with the market, raising their β.
3. Apply CAPM: using E[R] = Rf + β(E[Rm] − Rf), an increase in β raises E[R] proportionally. Thus, if lower-investment firms have higher β, they will have higher expected returns.
4. No numeric computation is required beyond the CAPM formula; the algebraic implication is direct: higher β → higher E[R].

Why the correct choice is correct:
- The answer “earn higher expected returns going forward because they have high CAPM β” follows directly from CAPM and the observed linkage between low investment and greater market sensitivity (higher β), yielding higher expected returns.

Why the other options are incorrect:
- “Earn lower expected returns…because they have low CAPM β”: contradicts both the empirical relation (low-investment firms tend not to have low β) and CAPM logic.
- “Earn higher expected returns…because they have high cost of capital”: this is circular and less precise; CAPM explicitly ties expected return to β rather than a vague “cost of capital” explanation.
- “Earn lower expected returns…because they have low cost of capital”: inconsistent with CAPM and the empirical pattern.

Conclusion: The correct answer is “earn higher expected returns going forward because they have high CAPM β,” which matches the provided answer.

Firms with lower investment rates tend to单项选择题

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