Capital Asset Pricing Model Diversifiable Research Proposal

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The CAPM is useful to investors from two standpoints -- time value of money and the risk associated with the money invested. The time value of money is revealed by the free rate risk and represents the compensation investors will receive for having invested their money in the respective share, for a specific period of time. The risk of the investment is revealed by the second part of the formula -- beta x (expected market return -- risk free rate) -- and it unveils the compensation the investor should receive for making an investment with the given levels of risk involved. In achieving this desiderate, the Capital Asset Pricing Model assigns a beta, which helps compare the returns of the asset to the market, over the given time period, and to the market premium.

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Basically, "the CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk If this expected return does not meet or beat the required return, then the investment should not be undertaken" (Investopedia, 2009).

The CAPM has a dual utility in the meaning that it can reveal valuable information for the company as well as the investors. In this order of ideas, the most useful application of the Capital Asset Pricing Model for economic agents is that it reveals the strength of their organizational shares. This in turn reveals the company's financial health and points to matters which necessitate improvement. Finally, it reveals the market attractiveness of their stocks and as such the ability to increase their capitals through shareholders' equity......

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