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Risk-return Relationship

In the CAPM, the expected return on an asset varies directly with its systematic risk and the risk premium of the market portfolio, In other words, the risk premium for in asset or portfolio is a function of its beta. The risk premium added to the risk-free rate is directly proportional to beta. The risk premium of a market portfolio, also referred to as reward, depends on the level of risk-free return and return on the market portfolio. In short, information related to the following three aspects are needed to apply the CAPM: risk-free rate risk premium on market portfolio and beta.

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