15.6 CAPM formula

Expected Security Return = Riskless Return + Beta X (Expected Market Risk Premium)


R = RF + Beta X (RM - RF)


R : is the expected return rate on a security.

RF: is the rate of a 'risk-free' investment, i.e. cash

RM: is the return rate of the appropriate asset class.

Beta is the overall risk in investing in a large market such as the BSE and the NSE. Each company also has a beta. The beta of a company is that company’s risk compared to the beta (risk) of the overall market. If the company has a beta of 3.0, then it is supposed to be three times more risky than the overall market. Beta indicates the volatility of the security, relative to the asset class.

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