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CAPM, SML, and Investors

The Capital Asset Pricing Model (CAPM) is a widely used concept in finance. The model is expressed graphically by the Security Market Line (SML). Within the context of investment, explain how CAPM can be useful to investors.

Solution Summary

This solution explains the components of the Capital Asset Pricing Model (CAPM) and graphically illustrates the components in a Security Market Line (SML). The solution also shows the computation using a simple example. Finally, a short discussion on investor approach to CAPM is included.