Final answer:
CAPM asserts that the expected return of a well-diversified portfolio is the risk-free rate plus a risk premium based on the portfolio's beta. This illustrates the principle that higher risk is typically associated with higher expected returns, explaining why stocks generally have higher average returns than bonds or savings accounts.
Step-by-step explanation:
The statement about the Capital Asset Pricing Model (CAPM) is true. According to CAPM, the expected return on a well-diversified portfolio should equal the risk-free rate plus a risk premium that is proportional to the portfolio's beta. The beta measures the portfolio's volatility relative to the market as a whole. Thus, the return on a well-diversified portfolio should be the sum of the risk-free rate and the product of the portfolio's beta and the market risk premium (the difference between the market return and the risk-free rate).
Understanding this relationship is crucial for investors, as it helps to align the expected return with the level of risk taken. This explains why, over time, stocks typically yield higher average returns than bonds, and bonds yield higher returns than savings accounts. The varying degrees of risk associated with each type of investment are compensated by differing expected rates of return.