What is the CAPM and of what practical use is it Essay - 3

What is the CAPM and of what practical use is it - Essay ExampleAccording to CAPM, the judge return of a portfolio or a security is considered to be equal to the rate of a stake free security plus a premium for the risk factor.The risk factor is mainly careful by taking a measure of risk called as beta in the model of CAPM. genus Beta is considered to compare the returns on a particular security to the market return. The formula for the CAPM is as followsThe development of the CAPM was normally to explain the pricing of risky securities in the market. It is considered as a more practical approach to be withstand valuation as compared to the Markowitz theory which is considered to be more theoretical (Armitage, 2005, p. 51). The assumptions of the Capital Asset Pricing vex are as followsI) It is considered that investors in general tend to maximize the utility of their wealth. The preferences of investors are taken into love through the concept of utility in the CAPM. Investor s considered to be more willing to take risks are considered to have increasing marginal utility with regard to wealth while investors who are considered to be risk antipathetic tend to have less preference for incremental wealth when it is considered to be associated with higher risk.II) It is considered that investors in general show similar expectations with regard to return and risk. It is considered in this regard that if investors do not have similar expectations, there will be no homogeneity in the conceptions of investors and as such no angiotensin-converting enzyme efficient frontier line will apply to all investors.III) It is held that investors tend to make investment decisions on a rational basis depending on their preference for return and risk. Risk is considered to be mainly metric by two factors such as variance and mean. CAPM is considered to assume that rational investors tend to diversify away unsystematic