Explain capital asset pricing method. (500 words)

CAPM is an economic theory which describes the relationship between risk and expected return of a financial asset.

- Model the model and then go into a more detailed look at its main unit – beta model.
- Explain how systemic risk and risk not based on any system are different.
- Analyze what the beta measures in line with systematic risk and how it correlates with the required return.
- Provide the investors with an overview of a SML and expected return of a particular investment.
- Discuss capital allocation line and optimum risky portfolios using different kinds of relationships.
- State assumptions of the economy: no taxes or transaction costs, perfect financial markets and so on.
- Concluding with some practical applications and also outlining the potential limitations of the CAPM model.