Capital Asset Pricing Modfel slp Assignment Example | Topics and Well Written Essays - 500 words

Capital Asset Pricing Modfel slp - Assignment Example However, in the CAPM (capital asset pricing model), beta risk denotes the only type of risk for which an investor should receive an expected return that is greater than the risk-free rate of interest (Ehrhardt & Brigham, (2009). The estimated beta coefficient of Apple Inc. is 1.25. A beta of higher than one generally implies that the price of stock of such a company is both more volatile and tends to move up and down with the market. For instance, like in the case of Apple Inc. A stock’s beta of 1.25, theoretically implies that the security is 25 percent more volatile than the market. Such stock is riskier than the market. Even though it poses more risk, the stock should be included in the overall portfolio because it offers the possibility of a greater rate of return. This is so because a beta value of 1.25 indicates that the security is anticipated to do 25% better than the S&P 500 within an up market. This stock should be included in the portfolio to help diversify it due to its high risk-reward ratios (Bradfield, 2007). Capital Asset Pricing Model (CAPM) refers to an economic model that is used to value securities, stocks, assets or derivatives by relating risk and expected return. It is based on the principle that investors demand a risk premium, additional expected return, in case they are required to accept additional risk. CAPM is, therefore, used in pricing stocks or securities (Ehrhardt & Brigham, (2009). Cost of equity or expected rate of return refers to the rate of return that an investor requires before being interested in any given investment at a particular price. It is the rate of return that compensates them for a higher expected risk (Reilly & Brown, 2012). The portfolio is sufficiently diversified; because it has a beat of less than one meaning the assets move in the same direction however the movement is less than that of the benchmark hence less susceptible to everyday fluctuation (Bradfield,