0 beta please click the advert the relationship

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Unformatted text preview: CAPM: Figure 6: Portfolio expected return Expected Return (%) Security market line Market portfolio Slope = (rm - rf) Risk free rate 1.0 Beta ( ) Please click the advert The relationship between and required return is plotted on the securities market line, which shows expected return as a function of . Thus, the security market line essentially graphs the results from the CAPM theory. The x-axis represents the risk (beta), and the y-axis represents the expected return. The intercept is the risk-free rate available for the market, while the slope is the market risk premium (rm í rf) Download free ebooks at bookboon.com 39 Corporate Finance Risk, return and opportunity cost of capital CAPM is a simple but powerful model. Moreover it takes into account the basic principles of portfolio selection: 1. Efficient portfolios (Maximize expected return subject to risk) 2. Highest ratio of risk premium to standard deviation is a combination of the market portfolio and the risk-free asset 3. Individual stocks should be selected based on their contribution to portfolio risk 4. Beta measures the marginal contribution of a stock to the risk of the market portf...
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