If any one investing money on securities need to assume certain level of risk on returns.

CAPM model to determine what return they get from that risk. CAPM demonstrated how risk and return can be linked together specified the nature of the risk-return relationship for any security or asset. Securities market means all risk CAPM divide that risk in to two part: Total Risk= systematic+ unsystematic risk

CAPM basically divided in to five parts:

The beta coefficient, (); The CAPM equation; The CAPM graphthe security market line (SML); Shifts in the SMLinflationary expectations and risk aversion; Comments and criticisms of the CAPM.

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Beta value basically explains the stability of the company in stock market . If company is giving returns according to the market returns than beta value is constant and vice-versa Beta is simply the change in the excess return on the stock over the change in excess return on the market portfolio.

BETA VALUE DETERMINATION:

A shares beta is determined from the historical values of the shares returns relative to market returns. It is important to appreciate therefore that beta is a relative, not in absolute, measure of risk.

Beta =

covariance Variance covariance: mean value of share return and market return. Variance: square of the standard deviation of market return

CAPM EQUATION E(r)=Rf+(ERmRf) Derivation: E(r) =required return on asset/share Rf =risk-free rate of return =beta coefficient for asset/share ERm=expected market return, that is the return expected on the market portfolio of shares

SECURITY MARKET LINE: When the CAPM equation is shown in graph form, the resultant straight line is referred to as the security market line (SML). The SML represents the level of return expected in the market for each level of the shares beta (market risk) It is the line which exhibits the positive relationship (correlation) between the systematic risk of a security and its expected return

Basically SML shows the expected return of market. It compares the company returns with market returns.

SML not give exact data when economy changes again and again like inflation or deflation etc
We cant rely 100% on these data.