Final answer:
The formula for the Capital Asset Pricing Model (CAPM) is: Expected Return on a security = Risk-free rate + (Beta of the security * Market risk premium). The components of the CAPM formula are: Risk-free rate, Beta of the security, and Market risk premium.
Step-by-step explanation:
The formula for the Capital Asset Pricing Model (CAPM) is:
Expected Return on a security = Risk-free rate + (Beta of the security * Market risk premium)
The components of the CAPM formula are:
- Risk-free rate: The rate of return on a risk-free investment, such as a government bond.
- Beta of the security: Measures the sensitivity of a security's returns to the overall market returns.
- Market risk premium: The excess return expected from investing in the market portfolio compared to a risk-free investment.