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CAPM EQUATION:
CAPM is that the expected return of an asset which will be related
to a measure of risk for that asset known as beta. CAPM specifies
the manner in which expected return and beta are related. It
provides the intellectual basis for a number of the current practies
in the investment.
according to CAPM, the relation between Risk and Return is
Ki=Rf + $(Km - Rf)
where Ki = Required or expected rate of return on security
Rf = Risk free rate of return
$ = Beta coefficient of a security
Km = Expected rate of return on market portfolio
Return: Return from an investment is the realisable cash flow
earned by its owner during a given period of time. for example, a
security is purchased for rs. 80. The investor gets dividend of rs. 2
per share and market price after one year is rs. 90. What is the
return?
The Rate of Return = Total Return/investment * 100
Total Return = Dividend + Capital appreciation
= Rs. 2 + 10(90-80)
1
= Rs. 12
Rate Of Return = 12/80 *100
= 15