33.14
14.Write down and explain the formula for the Capital Asset
Pricing Model. (4)
This formula says that the expected return on any asset comes from 2 components. The first is the risk free return--the return we require just to give up the use of our money for a year, even if we're certain that we'll get it back. The second is some compensation for the amount of risk we are taking on. The beta measures the number of units of risk we're taking and the difference between the expected return on the market and the risk free rate is the "risk premium," or compensation per unit of risk.