Discuss the role of the Capital Asset Pricing Model (CAPM) in portfolio management.
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Capital Budgeting & Portfolio ManagementSubjectiveQuestion 5766 of 6
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Detailed Solution & Explanation
The Capital Asset Pricing Model (CAPM) plays a crucial role in portfolio management by providing a framework for evaluating the expected return of an investment based on its level of risk. The CAPM states that the expected return of an investment is a function of the risk-free rate, the market risk premium, and the investment's beta. The model helps investors to determine the required rate of return for an investment, given its level of risk, and to evaluate the performance of a portfolio by comparing its actual returns to its expected returns. The CAPM also provides a basis for constructing portfolios that optimize the trade-off between risk and return, and for making informed investment decisions.
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