Question

DISCUSS THE CAPITAL ASSET PRICING MODEL, INCLUDING SYSTEMATIC RISK, BETA, THE RELATIONSHIP BETWEEN RISK AND RETURN, HOW TO AVOID RISK, AND THE RELATIONSHIP BETWEEN OF BETA TO STOCK PRICES

Answer 1

Capital Asset Pricing Model aka CAPM is the model which tries to quantify the risk and return relationship.

CAP Model has various components on which depends for calculations:

• Risk-Free Rate - Is the return an investor can earn even with assuming an only nominal level of risk. This can be seen as the base rate of return.
• Risk premium - Is the premium of return over risk-free rate which an investor tries to achieve which a given level of risk.
• Beta - It is the measure of stock's risk reflected - it denotes the unsystematic risk for the business.

The risk denoted by the Beta is a company-specific risk which shows a company's relative risk as to the market risk. This type of risk can be easily reduced by maintaining a good balance diversified portfolio by the investor.