As it is known, the Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks (Kenton and Mansa, 2020). CAPM is an approach to assessing the cost of shareholder equity. It is based on the postulate that the cost of capital grows as the risk grows - the more risky the project, the more its profitability should be.
The cost of capital refers to the interest rate that the investor expects to receive. It is logical that for investing in assets with a high level of risk, the investor wants to get a higher rate of return. He should not get into difficulties if he can get the same rate of return with a lower level of risk (Berk and van Binsbergen, 2017).
The model provides a methodology for quantifying risk and interpreting that risk into an estimated expected return on equity (Berk and van Binsbergen, 2017).
The main advantage of CAPM is the objective nature of the assessed value of capital. CAPM cannot be used i...
QUESTION 1 Mrs Bounty manages a diversified UK equity portfolio which has a current market value of £2 million and a beta value of