CAPM Model: An Evaluation of Risk and Return Relationship

Running Head: Finance
1
Project Report: Finance

Finance
2
Executive summary:
Introduction:
CAPM model:
CAPM is an investigation model which explains about the relationship of systematic
risk and the return from the assets of an organization. It is widely used in the corporate
finance by the financial analysts, investors etc to measure the total return from the assets and
security of the business. CAPM is most common method to measure the discount rate of the
company and evaluate the total cost of the business in consideration of the security amount.
The very general idea about the capital assets pricing model is that the investors are required
to compensate it in two ways which are risk and time value of money.
Background of the study:
In the report, CAPM model has been evaluated; various studied have been conducted
on the CAPM model to measure the overall performance of the business. The CAPM model
is considered by the investors and the financial managers both to measure the performance of
the business, capital structure and the investment level of the business. Due to which, it
becomes important to understand the concept off the CAPM model. CAPM model offers a
great value about the equity cost of the business on the basis of the volatility in the stock
price, risk free rate and the market return from the company.
Currently, the literature review has been done on the CAPM model, process,
characteristics etc to measure the overall position and the importance of the CAPM model in
a business. In the report, history, modification and current scenario of CAPM model has been
studied and it has been found that when the concept has been started, why it has been started
and what is the current phase of the CAPM model. Various CAPM theories have also been
studied to measure the CAPM model effectively. The main focus has been done on the
Markowitz portfolio theory, modern portfolio theory, miller and schools theory, black theory
etc.
Further, along with the study, it has been found that the CAPM model has been
criticized a lot by various economist and financial managers such as Merton (1973), Roll
(1997) etc. Other related theories have also been studied along with the CAPM model to
understand the concept briefly. The various elements of the CAPM model have also been