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CORPORATE FINANCE
(CF)
MODULE CODE: FC30-3
LEVEL 3
CAPITAL ASSET PRICING MODEL
HUMERA MOHAMMAD SHAHID MOHAMMAD SHAFI (2010120)
AYSHA ABDUL AZIZ AL BASRAWI (2010113)
WORDS 2,532

CAPITAL ASSET PRICING MODEL
INTRODUCTION:
When an investor invests in market, he expects high returns with high risk. As an investor it is very difficult to get rid of all the risk, if he expands his investments. They deserve a rate of return that satisfies them for taking on risk. Risk and return are connected to each other. Investors use a model to calculate how much return he will get and how high would be the risk. The model is called CAPM.
CAPM refers to as capital asset pricing model which can be defined as an approach to find out the investment’s risk and return. In other words it calculates the risk of an investment and determines what return on investment they would get. By the help of CAPM, investors could take the risk to which they are capable of. CAPM was originated by financial economist William Sharpe, Jack Treynor and John Linter. This model is based on earlier modern portfolio theory of Harry Markowitz stated by Gibbons, M.R. and Ferson, W., (1985) .Based on the CAPM; there are different types of risk which are classified under two main groups: systematic risk and unsystematic risk.
Jonathan, B.,(1998) has stated that systematic risk refers to fluctuations of returns due to the influence of macroeconomics factors that affects all the organization. Systematic risk includes different kinds of risk which are market risk, interest rate risk and inflation risk.
Whereas unsystematic risk refers to the fluctuation of returns due to the influence of microeconomic factors that affects only a specific organization. These factors are controlled within an organization and not the whole market. Unsystematic risk includes business risk and financial risk.
The following report provides a discussion on the concept of beta of capital asset pricing model and the relationship...