Final answer:
In the Capital Asset Pricing Model, the expected rate of return on any security is given as Rf + β [E(RM) - Rf], where Rf is the risk-free rate, β is the investment's beta, and E(RM) is the expected market return.
Step-by-step explanation:
According to the Capital Asset Pricing Model (CAPM), the expected rate of return on any security is equal to B. Rf + β [E(RM) - Rf].
The CAPM formula is used to determine the theoretically appropriate required rate of return of an asset, where Rf represents the risk-free rate of return, β (beta) denotes the measure of the risk arising from exposure to general market movements, and E(RM) is the expected return of the market. The difference between E(RM) and Rf represents the market risk premium, which compensates investors for taking on the higher risk of investing in the stock market over a risk-free investment.
Investments come with various risks, such as default risk and interest rate risk, which can affect the actual returns compared to the expected returns. High-risk investments often exhibit a wide range of actual returns, sometimes significantly above or below the expected return, while low-risk investments tend to have more stable returns closer to the expected rate.