CAPM and Risk Return

• • Formula: E(R)=Rf+β(Rm−Rf)
• • Β > 1: More volatile than the market → Higher expected return.
• • Β = 1: Matches market volatility → Same as market return.
• • Β < 1: Less volatile than the market → Lower expected return.
• • Β = 0: No correlation with the market → Expected return equals the risk-free rate.
• • Higher Beta = Higher Expected Return: Beta measures sensitivity to market movements. Greater beta implies greater risk and potential reward.
• • Risk-Free Asset Beta = 0: A portfolio mixing risk-free assets and the market portfolio has a weighted beta.
• • Stock Prices Reflect Expectations: Prices adjust rapidly to new information.