Capital Asset Pricing Model

Capital Asset Pricing Model
Name
Institution

Capital Asset Pricing Model
It is a model that demonstrates the association of required return and systematic risk of a venture. Notably, it is put in use extensively in the securities of the finance for pricing risk. From this model, it projects the needed return as the total of risk-free rate and result of the beta coefficient security and equity risk premium. Notably, the risk-free rate is one that the venture has no risk in the rate of return.
There is an association existing in the expected rate return in multiple group investments and that of a specific venture. Majorly, the expected return is what an investor expects as profit or loss on an already known investment outcome (Investopedia, 2003). Notably, the expected return not only applies to single investments but also multiple investments. Essentially, if there is a known expected return for each investment, then the entire portfolios expected return is an average of the components of the expected returns.
Systematic and unsystematic risk have several different relationships associated with them. Firstly, the management of the firm is done externally in systematic risk whereas the control of the firm is operated internally in the unsystematic risk (Top Differences, 2017). Secondly, systematic risk is non-diversifiable whereas unsystematic risk can be diversified.
There is a relationship existing between risk and the beta of an investment. Essentially, beta is used to measure the stock’s instability in the market (Investopedia, 2015).

Moreover, it evaluates the probability of a risk of a specific stock or substance in the market. It is essential for one to have an idea about the systematic risk of a substance. Primarily, this can be achieved by calculating its beta.
References
Investopedia. (2003). Expected Return. Retrieved from https://www.investopedia.com/terms/e/expectedreturn.asp
Investopedia. (2015). How does Beta reflect systematic risk? Retrieved from https://www.investopedia.com/ask/answers/031715/how-does-beta-reflect-systematic-risk.asp
Top Differences. (2017). Difference between Systematic risk and Unsystematic risk. Retrieved from http://topdifferences.com/difference-between-systematic-risk-and-unsystematic-risk/