Capital Asset Pricing Model - your guide to stock investment

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Capital Asset Pricing Model (CAPM) tries to explain the relationship between risk and expected return. CAPM says that expected return of a security equals to the risk free rate (government bond) plus risk premium as compensation for taking that risk. Risk premium is calculated using the help of Beta, which is a risk measure. Bigger Beta means higher risk, thus higher expected return. When facing higher risk, we must expected higher return.
Expected return = risk free rate + (market return – risk free rate)*Beta. z

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