Link between Risk and Return of Financial Asset using CAPM - Bega Cheese Case Study

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Assessment 2: Business Case Studies 1

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Introduction
This report has been undertaken to demonstrate the link between the risk and return of a
financial asset by adoption of Capital Asset pricing Model (CAPM). The extractions from the
theory and the context of the selected company ‘Bega Cheese’ are used for analysis and
examination of the risk and return measures from the parts 2(a) and 2(b).
Analysis and Examination of Risk and Return Relation of parts 2(a) and 2(b) by the
adoption of extractions of CAPM and Context of Company
The Capital Asset Pricing Model (CAPM) is sued widely by the investors for making
decisions in context of the risk associated with a particular investment option and the significant
returns to be realized. The model is finding extensive use in determining the price of the risky
securities and calculating the cost of capital (Peterson and Fabozzi, 2002). The following
formula has been provided by the CAPM model for determining the relation between risk and
return of securities:
The CAPM theory is developed by taking into account the concept of time value of
money and the risk. The risk-free rate calculated by the CAPM model is based on the concept of
time value of money that provides compensation in relation to investment undertaken over a
specific time-period. Beta in the formula represents the additional returns that will be realized by
the investors to take additional risk. Thus, as per the model the expected return on a security is
determined through calculating the risk-free security in addition to a risk premium. The decisions
of the investors whether to invest money or not is based on making a comparison of expected
return of security with the required rate of return. The situation in which in the expected rate of
return calculated by the formula is greater than the required return then investors are
recommended to take a particular investment option and vice-versa. The model can be used for
portraying the impact of the changes in the prices of the securities and can be used for assessing