Beiefly explain, discuss and comment on CAPM (Capital Asset Pricing Model)

Expert Solution

Capital Asset pricing model is a model in order to determine the expected rate of return of various securities and it is used to determine the expected rate of return after ascertainment of risk free rate along with market risk premium and it will be adjusted with the systematic beta of the company.

systematic risk of the company will be represented in the form of Beta and beta will be adjusted with the market risk premium and it will added with risk free rate in order to arrive at the expected rate of return and it is providing with the rate of return after adjustment of risk. it is a risk adjusted method to determine expected rate of return and I think that this is a one factor Model so it has its own limitation and it always believe that the portfolio is diversifed and every investor have homogeneous expectation which is not true in real life.

I think it is a a common method of calculation of cost of equity but it is not the the absolute method because it is just one factor Model.

Expected rate of return=risk free rate+( betaX market risk premium.)

jeff jeffy answered 2 years ago

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