## Step-by-Step Solution ### Step 1: Understanding CAPM **CAPM** stands for the **Capital Asset Pricing Model**. It is a model used to determine the expected return of an asset (like a stock) based on its risk compared to the overall market. The CAPM formula is: \[ E(R_i) = R_f + \beta_i [E(R_m) - R_f] \] Where: - \(E(R_i)\) = expected return of the stock - \(R_f\) = risk-free rate - \(\beta_i\) = beta of the stock (a measure of its risk relative to the market) - \(E(R_m)\) = expected return of the market - \([E(R_m) - R_f]\) = market risk premium ### Step 2: Analyzing the Options - **A. Its total risk**: CAPM does **not** use total risk. It only uses systematic (market) risk, not unsystematic (unique) risk. - **B. Its beta**: **Beta** measures the stock's sensitivity to market movements (**systematic risk**), and it is the only risk factor in the CAPM formula. - **C. Its dividend payout ratio**: Not used in the CAPM formula. - **D. Its accounting earnings**: Not used in the CAPM formula. ### Step 3: Choosing the Best Answer From the CAPM formula, **the expected return depends on the stock's beta**. --- ## **Final Answer** **B. Its beta** **Explanation:** According to CAPM, the expected return of a stock depends on its beta, which measures its sensitivity to market movements (systematic risk), not its total risk, dividend payout, or accounting earnings.