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Capital Asset Pricing Model and Beta

The capital asset pricing model (CAPM) relates the risk return trade-off of individual assets to market returns so that a security has a risk-free rate of return and a premium for risk.

-Explain in detail the components of CAPM.
-Please also include the formula and an explanation of beta.

Solution Preview

The capital asset pricing model is a way for an investor to look at the risk and return of an investment by evaluating the risk of the investment against both risk-free US Treasury bills and the stock market as a whole using the following formula: rf + b ( rm - rf ). The three components of the CAPM is the risk free rate, the beta coefficient and the expected market return. The risk free rate is the minimum return an investor ...

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