8. In a single-factor market, the SML relationship of both the CAPM and the APT states that the risk premium on any security is proportional to beta, or, equivalently, that the security's expected return must be a linear function of beta. Suppose this is not the case, specifically, that expected return rises more than proportionately with beta as in Figure 7.5. (LO 7-1) En FIGURE a. Could this figure be an accurate depiction of the mean-beta relationship in market equilibrium? Hint: Consider the return on a combination of portfolios A and B constructed to match the beta of portfolio C. b. Some researchers have examined the relationship between average returns on diversi- fied portfolios and the ß and ß² of those portfolios. What should they have discovered about the effect of B² on portfolio return? 7.5

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Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.