Final answer:
The CAPM indicates that various factors, such as currency strength, economic policies, company-specific events, and changes in T-bill yields, can affect a risky asset's return. Expected exchange rate changes can influence the yield on government bonds due to shifts in currency demand. Confidence in an economy and the level of international trade also play roles in the supply of financial capital and capital deepening.
Step-by-step explanation:
According to the Capital Asset Pricing Model (CAPM), several events can affect the return on a risky asset. Events such as a strengthening of the country's currency, Federal Reserve actions that impact the economy, internal company incidents like a fire in the company's plant, a change in the company's leadership, and broader economic indicators like a change in the yield on T-bills all have the potential to influence the expected return of a risky asset.
If a country's currency is expected to appreciate, the demand for that currency would likely increase as investors seek to benefit from the future increase in value. This increased demand can drive up the yield on government bonds as international investors are willing to accept lower interest rates to hold investments denominated in that currency. However, if confidence in the U.S. economy diminishes, this might affect the demand or supply of financial capital, leading to higher perceived risk and potentially requiring higher yields to attract investment.
Capital deepening, which involves increasing the amount of capital per worker, is generally associated with economic growth and higher productivity. In a weak economy where businesses hesitate to invest in physical capital, capital deepening could be hindered. Conversely, a rise in international trade could lead to capital deepening as businesses invest in more capital to meet increased demand.