3.13 Diagram of the CAPM

In order to diagram the “CAPM, let us devise an example. Suppose you are given the following: 


RM = .20

RF = .05

βP= 1.5



RP = RF + (RM – RF) βP

RP = (.05) + (.20 – .05) 1.5 = .275


In this case, you have chosen a stock with greater volatility than the market, and your risk premium will provide a greater return as well. Just beware that risk also means that your expected return is not assured in the short-run and that, in the long-run, things may change so as to alter the formula’s inputs. Life is not so simple.


Now we can graph this (try to fill this in):


See the next page for more insight.


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Corporate Finance Copyright © 2023 by Kenneth S. Bigel is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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