Python Exercises for Corporate Finance and Risk Management

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Question: 83

Assume that CAPM model holds. Also, consider expected market return (rm) of 10%, risk-free rate (rf) of 4%. If a security has a market beta (peta) of 0.5, what is the correct value of expected returns (ri) as per CAPM.


The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk, or the general perils of investing, and expected return for assets, particularly stocks. CAPM evolved as a way to measure this systematic risk. It is widely used throughout finance for pricing risky securities and generating expected returns for assets, given the risk of those assets and cost of capital.

  • Define a function with the name "CAPM" which will take three arguments, market returns, risk free rate, and market beta.
  • The signature function should be like:

def CAPM( market_return, risk_free_rate, market_beta ):

-Use the formula, CAPM = expected return(ri) = risk free rate + market beta *(market return (rm)- risk free rate (rf))

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