Capital Asset Pricing Model

2. • Capital Asset Pricing Model allows us to
compute expected rate of return of the asset
based in systematic risk
• It asserts that expected returns of asset varies
only by systematic risk as measured by Beta
Rf and MRP
β
CAPM Ri

4. Assumptions of CAPM
• Investors are risk averse, utility maximizing
and rational
• Frictionless markets
• Homogeneity of expectations
• Single holding period
• Investors are price takers
• Investments are infinitely divisible

5. EX: Standard deviation of returns for given security is 25% its
correlation with market is 0.6. standard deviation of returns
for market is 20% . The expected market return is 10% and
risk free rate is 3% what is expected return of given security?

6. Thank You