Question

CAPM and Beta. Capital Asset Pricing Model (CAPM) is a theoretical model that indicates the relevant risk of an investment as measured by its beta coefficient. Discuss the CAPM and beta and how beta and CAPM provide information about the rate of return for a Beta is a measure of a stock’s relevant risk. There is a relationship between risk and reward for a given investment.

Answer 1

Capital Asset pricing model is focusing at finding of the expected date of return by incorporation of Beta which is a measure of the systematic risk of the company.

Beta will measure the overall market risk associated with movement of a company and it will be telling about the risk associated with the investment when adjusted with the market risk premium along with beta

So, Capital Asset pricing model is a risk adjusted return model which is used to find expected rate of return after incorporation of the systematic risk into the model and then it is used to assign this premium by comparing with the market risk with the risk free rate and then the risk free rate of return is appreciated when it is discounted with different kinds of systematic risk and market premium in order to find the expected rate of return.

There is always a relationship between the risk and returm because an individual will be taking risk on various investment in order to earn a reward and these risks are often indicated that higher the risk and higher the reward, so there would be a direct relationship between both risk and reward.