The CAPM Computes Expected Rates of Return on Common Equity

question 42

Essay

The CAPM computes expected rates of return on common equity capital using the following model:
E[REⱼ] = E[RF] + ⱼ x {E[RM] - E[RF]}
What are the roles of each of the three components of this model?

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Definitions:

Negotiable Instrument

A document that promises to pay a certain sum of money, which can be demanded at any time or on a fixed date, and allows the beneficiary to transfer this right to someone else.

Commercial Paper

An unsecured, short-term debt instrument issued by corporations, typically used for financing immediate needs.

Payment

The transfer of money, goods, or services as compensation or fulfillment of an obligation.

Demand Instrument

A type of draft that allows the payee to demand payment at any time from a holder.