CAPM Assignment Example | Topics and Well Written Essays - 1000 words - 1

CAPM - Assignment Example Based on the rationale obtained in relation to these mentioned fields, the paper aims at concluding with regard to the relevance of CAPM for corporate managers (Fama & French, 2003). CAPM is valued high owing to its ability to guide investment projects through accurate calculation about the relationship between the risk and return. This relationship provides two major functions. First, it serves as a standard regarding the rate of return for assessing the potential investments and second, it helps generating a cultured guess, rather than a biased one, with regard to return on assets, which have not been traded in the market place. The common concept behind CAPM is that investors must be remunerated in two ways, i.e. time assessment of money as well as risk (Leonard, Loli, Kralj & Vlachos, 2012). The relationship of risk and return can be described with regard to the fact that low level of risk is connected with low potential returns and high risks are connected with high potential returns. In general terms, ‘risk’ is considered as negative concerning the fact that risks imply investments and their returns as conditional, wherein investors may or may not be able to generate their desired level of profit. It is thus that CAPM suggests, considering high risk of return, investors must be conscious about their possible risk tolerance at the time of selecting investment projects for their portfolio. Notably, according to the model, there are two types of risks those can be possible when selecting investment, such as systematic risks and unsystematic risks (Leonard, Loli, Kralj & Vlachos, 2012). CAPM helps to calculate the cost of equity of a private company by assessing the betas and thereafter, calculate the cost of debt by estimating risk of default as well as cost of debt after tax. In a private company, the originations of risks and