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Chapter -III
CAPITAL ASSET PRICING THEORY:
CAPM AND ITS USE IN CORPORATE FINANCE
Topics:
❑ The role of CML in pricing models derivation.
❑ Assumptions for capital asset pricing model.
❑ The market portfolio. Security market line (SML): the slope, the comparison to CML.
❑ The stock's beta: true beta, factors affecting true beta.
❑ Improving the beta estimated from regression (top-down beta).
❑ The problem of adjusted beta.
❑ Estimating the market risk premium.
❑ Critiques of the CAPM.
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Introduction
The Capital Asset Pricing Model (CAPM) is a widely used tool in finance for estimating the
expected return of an asset based on its risk characteristics. However, its practical applicability
relies on several assumptions, which may limit its accuracy and relevance in real-world financial
decision-making.
Capital Asset Pricing Model (CAPM) is a financial theory that describes the relationship between
systematic risk and expected return for assets, particularly stocks. It provides a framework for
calculating the expected return on an investment based on its risk relative to the overall market.

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The key components of CAPM are:

• Expected Return: The return an investor anticipates receiving from an investment. In
CAPM, expected return is calculated as the risk-free rate plus a risk premium.
• Risk-Free Rate: The theoretical rate of return of an investment with zero risk of financial
loss, typically represented by government bonds.
• Market Risk Premium: The additional return an investor expects to receive for holding a
risky asset compared to a risk-free asset. It's determined by the overall risk tolerance of the
market.
• Beta (β): A measure of a stock's volatility in relation to the overall market. It quantifies the
relationship between the price movements of a stock and the overall market. Beta of 1
means the stock's price is expected to move in line with the market, while beta greater than
1 implies higher volatility and less than 1 implies lower volatility.

The formula for CAPM is:

Expected Return = Risk-Free Rate + [ Beta × (Market Risk Premium)]
In essence, CAPM suggests that the expected return on an investment is directly proportional to
its beta (systematic risk), and the degree to which it is affected by the overall market risk premium.
Though CAPM has its critics and limitations, such as assumptions of market efficiency and a
single-period model, it remains a fundamental concept in finance for understanding the
relationship between risk and return in investment valuation.

ASSUMPTIONS OF THE CAPM:

Efficient Markets Hypothesis (EMH):
• Assumption: CAPM assumes that financial markets are efficient, meaning that all available
information is reflected in asset prices and that investors cannot consistently outperform
the market.
• Implications: In practice, markets may not always be perfectly efficient, and anomalies or
inefficiencies can exist, leading to mispricing’s of assets. If markets are not fully efficient,
the expected returns predicted by CAPM may not accurately reflect actual returns, limiting
its usefulness for decision-making.

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Homogeneous Expectations:
• Assumption: CAPM assumes that all investors have homogeneous expectations regarding
risk and return and that they hold the same market portfolio.
• Implications: In reality, investors may have diverse risk preferences, investment horizons,
and expectations, leading to heterogeneous beliefs about asset returns. If investors do not
hold the same market portfolio or have different risk perceptions, CAPM's predictions may
not align with actual market behavior, reducing its practical applicability.

Risk-Free Rate:
• Assumption: CAPM assumes the existence of a risk-free rate, representing the return on a
theoretically risk-free asset with zero volatility.
• Implications: While risk-free rates exist in theory (e.g., government bonds), in practice, the
actual risk-free rate may be influenced by factors such as monetary policy, inflation
expectations, and credit risk. Fluctuations in the risk-free rate can impact CAPM's
calculations and may require adjustments to reflect changing economic conditions.

Markowitz Mean-Variance Optimization:

• Assumption: CAPM is based on Markowitz mean-variance optimization, which assumes
that investors make decisions solely based on expected returns and variance of returns.
• Implications: Mean-variance optimization may not fully capture investors' preferences for
higher moments of return distributions (e.g., skewness, kurtosis) or non-normal return
distributions. Additionally, investors may have other objectives besides maximizing
expected return and minimizing variance, such as liquidity needs or ethical considerations,
which are not accounted for in CAPM.

Single-Period Time Horizon:

• Assumption: CAPM assumes a single-period time horizon, where investors make
investment decisions based on expected returns and standard deviation over a specific time
frame.
• Implications: In practice, investors often have multi-period investment horizons and face
uncertainties about future market conditions, cash flow requirements, and changing risk

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preferences over time. CAPM's static framework may not adequately capture the dynamic
nature of investment decision-making over different time horizons.

Perfect Capital Markets:

• Assumption: CAPM assumes that investors can borrow and lend at the risk-free rate, there
are no taxes or transaction costs, and assets are perfectly divisible.
• Implications: In reality, capital markets may not be perfect, and factors such as taxes,
transaction costs, market frictions, and liquidity constraints can impact investment
decisions and asset pricing. Deviations from perfect market conditions may affect the
applicability of CAPM's assumptions and predictions in real-world settings.

Conclusion: CAPM provides a useful framework for estimating expected returns and assessing
the risk-return trade-off of assets, its practical applicability is contingent on the validity of its
underlying assumptions. Critically evaluating these assumptions is essential to understand the
limitations and potential biases of CAPM in financial decision-making. While CAPM remains a
valuable tool for academic research and as a benchmark for asset pricing, practitioners should
exercise caution and supplement CAPM with additional models, empirical evidence, and judgment
when making investment decisions in real-world contexts.

THE ROLE OF CML IN PRICING MODELS DERIVATION OF CAPM

The Capital Market Line (CML) plays a crucial role in the derivation of the Capital Asset Pricing
Model (CAPM). The CML is a graphical representation of the risk-return trade-off for efficient
portfolios in the market.

How the CML contributes to the derivation of CAPM:

1. Efficient Frontier and Tangency Portfolio: The efficient frontier represents the set of
portfolios that offer the highest expected return for a given level of risk or the lowest risk
for a given level of return. The point on the efficient frontier that is tangent to the CML is
known as the tangency portfolio or the market portfolio. This portfolio comprises all
investable assets in the market, weighted according to their market capitalizations.
2. Risk-Free Asset: The CML incorporates a risk-free asset, typically represented by
government bonds. By combining the risk-free asset with the market portfolio, investors

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can create portfolios that lie along the CML. The risk-free asset provides a baseline return
with zero risk, allowing investors to leverage or de-leverage their portfolios to achieve their
desired risk-return profile.
3. Capital Market Line Equation: The equation of the CML describes the relationship
between expected return and standard deviation (risk) for portfolios along the line. It is
given by:

(𝑅𝑝)=𝑅𝑓+𝐸(𝑅𝑚)−𝑅𝑓𝜎𝑚×𝜎𝑝E(Rp)=Rf+σmE(Rm)−Rf×σp
Where:
• 𝐸(𝑅𝑝)E(Rp) is the expected return of the portfolio.
• 𝑅𝑓Rf is the risk-free rate.
• 𝐸(𝑅𝑚)E(Rm) is the expected return of the market portfolio.
• 𝜎𝑚σm is the standard deviation (risk) of the market portfolio.
• 𝜎𝑝σp is the standard deviation (risk) of the portfolio.
4. Derivation of CAPM: By combining the CML equation with the definition of beta (𝛽β),
which measures the sensitivity of an asset's return to changes in the market portfolio,
CAPM can be derived. CAPM states that the expected return of an asset is equal to the
risk-free rate plus the asset's beta multiplied by the market risk premium (the difference
between the expected return of the market portfolio and the risk-free rate):
𝐸(𝑅𝑖)=𝑅𝑓+𝛽𝑖×(𝐸(𝑅𝑚)−𝑅𝑓)E(Ri)=Rf+βi×(E(Rm)−Rf)
Where:
• 𝐸(𝑅𝑖)E(Ri) is the expected return of the asset.
• 𝛽𝑖βi is the beta of the asset.
• 𝐸(𝑅𝑚)E(Rm) and 𝑅𝑓Rf are as defined above.

Thus, the CML provides the theoretical foundation for the risk-return relationship described by
CAPM, incorporating both systematic risk (represented by beta) and the risk-free rate. It illustrates
how investors can construct efficient portfolios that balance risk and return by combining the risk-
free asset with the market portfolio.

THE MARKET PORTFOLIO FOR CAPM

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In the context of the Capital Asset Pricing Model (CAPM), the market portfolio represents a
theoretical portfolio that contains all risky assets available in the market, weighted according to
their market capitalizations. It is often used as a proxy for the overall market. The market portfolio
includes stocks, bonds, real estate, and other investable assets.

Key characteristics of the market portfolio in CAPM:

• Diversification: The market portfolio is well-diversified, containing a wide range of assets
from different industries and sectors. Diversification helps reduce unsystematic or
idiosyncratic risk, leaving only systematic risk, which cannot be diversified away.
• Market Capitalization Weighting: Assets in the market portfolio are weighted based on
their market capitalizations, meaning larger companies have a greater influence on the
portfolio's performance compared to smaller ones. This reflects the aggregate investment
decisions of all market participants.
• Efficiency: The market portfolio is considered efficient in CAPM theory because it
represents the optimal portfolio along the efficient frontier, offering the highest expected
return for a given level of risk or the lowest risk for a given level of return.
• Inclusion of All Assets: The market portfolio includes all risky assets available to
investors, including stocks, bonds, commodities, and real estate. It is a comprehensive
representation of the investable universe.
• Risk-Return Characteristics: The risk and return characteristics of the market portfolio
serve as the benchmark for evaluating the performance of individual assets. The expected
return of the market portfolio is denoted by 𝐸(𝑅𝑚)E(Rm), and its risk is measured by the
standard deviation of returns or volatility.
In CAPM, the market portfolio is crucial for determining the relationship between risk and
return for individual assets. The expected return of an asset is determined by its beta (𝛽β)
relative to the market portfolio, representing the asset's systematic risk or exposure to market
movements. The market portfolio provides the basis for calculating the market risk premium,
which is the difference between the expected return of the market portfolio and the risk-free
rate.
THE MARKET PORTFOLIO - SECURITY MARKET LINE (SML) : THE SLOPE, THE
COMPARISON TO CML

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The Market Portfolio and the Security Market Line (SML) are both important concepts in finance,
particularly in the context of the Capital Asset Pricing Model (CAPM).

Market Portfolio:
The market portfolio, as mentioned earlier, represents a theoretical portfolio that contains all risky
assets available in the market, weighted according to their market capitalizations. It is considered
the optimal portfolio because it offers the highest expected return for a given level of risk or the
lowest risk for a given level of return, as per the principles of Modern Portfolio Theory (MPT).

Security Market Line (SML):

The Security Market Line (SML) is a graphical representation of the CAPM, showing the
relationship between the expected return and the systematic risk (measured by beta, 𝛽β) of
individual securities. The SML helps investors determine whether a security is fairly valued,
overvalued, or undervalued based on its risk-return profile.
Slope of the SML:
The slope of the SML represents the market risk premium, which is the additional return investors
require for taking on one unit of systematic risk. Mathematically, the slope of the SML is equal to
the difference between the expected return of the market portfolio (𝐸(𝑅𝑚)E(Rm)) and the risk-
free rate (𝑅𝑓Rf) divided by the market beta (𝛽𝑚βm):
Slope of SML=𝐸(𝑅𝑚)−𝑅𝑓Slope of SML=E(Rm)−Rf
Comparison to CML:
While the SML focuses on individual securities and their risk-return relationship relative to the
market portfolio, the Capital Market Line (CML) relates to efficient portfolios that combine the
risk-free asset with the market portfolio. The CML is a tangent line drawn from the risk-free rate
to the efficient frontier of risky assets. It depicts the optimal portfolios for investors considering
both risk-free and risky assets.

COMPARISON BETWEEN THE SML AND CML:

• Focus: SML focuses on individual securities, while CML focuses on efficient portfolios.
• Representation: SML is a line on a graph representing the CAPM, while CML is a tangent
line to the efficient frontier.

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• Risk-Free Asset: CML incorporates the risk-free asset, whereas SML does not directly
incorporate it but refers to it as the starting point.
• Application: SML is used to determine the fair value of individual securities, while CML
is used to construct efficient portfolios for investors with varying risk preferences.

In summary, while both the Market Portfolio and the Security Market Line are key components of
CAPM, they serve different purposes in assessing the risk-return trade-off in financial markets.

THE STOCK'S BETA: TRUE BETA, FACTORS AFFECTING TRUE BETA

A stock's beta, often referred to as its "true beta" or "historical beta," measures the sensitivity of
the stock's returns to movements in the overall market. A beta of 1 indicates that the stock's returns
move in line with the market, while a beta greater than 1 implies higher volatility, and a beta less
than 1 implies lower volatility compared to the market.

Factors affecting a stock's true beta include:

• Market Volatility: Stocks with higher beta values tend to be more volatile and have greater
price fluctuations compared to the overall market. If the market experiences periods of high
volatility, it can impact a stock's beta.
• Business Cycle Sensitivity: Companies operating in cyclical industries, such as
technology or consumer discretionary, may have higher betas because their earnings are
more closely tied to the economic cycle. During economic expansions, these companies
tend to outperform, leading to higher betas.
• Financial Leverage: Companies with high financial leverage, meaning they rely heavily
on debt financing, may have higher betas because changes in interest rates or economic
conditions can have a magnified impact on their stock prices.
• Operating Leverage: Companies with high operating leverage, such as those with high
fixed costs relative to variable costs, may experience greater fluctuations in earnings and
stock prices in response to changes in sales or revenue. This can contribute to higher betas.

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• Industry Dynamics: The nature of the industry in which a company operates can influence
its beta. For example, industries with high barriers to entry or significant regulatory risks
may have higher betas due to greater uncertainty.
• Company Size: Smaller companies tend to have higher betas compared to larger, more
established companies. This is because smaller companies may be more sensitive to
changes in market conditions and have less diversified revenue streams.
• Geopolitical Factors: Geopolitical events, such as wars, political instability, or trade
disputes, can impact market sentiment and affect a stock's beta, especially for companies
with significant exposure to international markets.
• Market Sentiment: Investor sentiment and market psychology can also influence a stock's
beta. Positive or negative news about a company or broader market trends can lead to
changes in perceived risk and affect beta values.
While historical beta provides valuable insights into a stock's past behavior relative to the market,
it is important to note that it may not always accurately predict future performance, as factors
influencing beta can change over time. Therefore, investors often use beta as one of several metrics
when assessing investment decisions and managing portfolio risk.

THE PROBLEM OF ADJUSTED BETA.

Adjusting beta estimates within the framework of the Capital Asset Pricing Model (CAPM) can
introduce several challenges and potential problems:
Model Consistency:
• Adjusted beta estimates may deviate from the fundamental assumptions of the CAPM
model, such as the linear relationship between systematic risk (beta) and expected return.
This inconsistency can lead to misalignment between the adjusted beta and the theoretical
predictions of CAPM.
Interpretation Issues:
• Adjusted beta estimates may be difficult to interpret within the context of CAPM,
particularly if the adjustments involve complex statistical techniques or subjective
judgment. This can undermine the transparency and clarity of the model, making it
challenging for investors to understand and apply in practice.
Model Overfitting:

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• Over-adjustment of beta estimates to account for specific data anomalies or outliers can
result in overfitting within the CAPM framework. This occurs when the adjusted beta
overly conforms to the idiosyncratic characteristics of the data, leading to inflated estimates
of beta variability and reduced predictive power.
Risk-Return Trade-off Distortion:
• Adjusting beta estimates may alter the risk-return trade-off implied by CAPM, potentially
leading to distorted estimates of expected returns for individual assets. If adjustments
introduce biases or inaccuracies in the beta estimates, the resulting portfolio allocations
and asset valuations may not align with the principles of efficient portfolio construction
under CAPM.
Market Efficiency Assumptions:
• CAPM assumes that markets are efficient, meaning that all relevant information is reflected
in asset prices. Adjusting beta estimates based on subjective judgments or ad hoc
adjustments may violate this assumption, leading to potential mispricing of assets and
inefficiencies in the market.
Complexity and Implementation Challenges:
• Implementing adjusted beta estimates within the CAPM framework can be complex and
challenging, particularly if adjustments involve sophisticated statistical techniques or
require access to additional data sources. This complexity may limit the practical
applicability of adjusted beta estimates in real-world investment decision-making.

Overall, while adjustments to beta estimates may be necessary to address certain limitations or
anomalies in the data, they should be approached with caution within the context of CAPM.
Investors should carefully consider the implications of adjusted beta estimates for portfolio
construction, asset valuation, and risk management, taking into account the underlying
assumptions and theoretical foundations of the CAPM model.

IMPROVING THE BETA ESTIMATED FROM REGRESSION (TOP-DOWN BETA).

Improving the estimation of a stock's beta, often referred to as top-down beta, involves refining
the methodology used in regression analysis or incorporating additional factors to better capture
the stock's sensitivity to market movements.

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Approaches to improve the accuracy of beta estimation:

• Data Quality and Period Selection:

• Ensure the accuracy and reliability of historical price data used in the regression
analysis.
• Choose an appropriate time period for the analysis that reflects the relevant
market conditions and economic environment.
• Regression Model Specification:
• Use appropriate benchmark indices or market proxies that closely reflect the
systematic risk factors affecting the stock.
• Consider using multi-factor models that incorporate additional risk factors
beyond the market index, such as size, value, momentum, and industry-specific
factors.
• Adjusted Beta:
• Adjust the raw beta estimate to account for factors such as non-trading periods,
outliers, or extreme market conditions that may distort the results of the
regression analysis.
• Weighted Regression:
• Assign different weights to historical returns based on their relevance or
significance in capturing the stock's sensitivity to market movements. For
example, recent returns may be weighted more heavily than older returns.

• Volatility Adjustments:
• Adjust the beta estimate to account for differences in volatility between the
stock and the market index. This can be done by standardizing the returns series
or adjusting for differences in variance using statistical techniques such as
GARCH modeling.
• Industry Comparisons:
• Compare the stock's beta estimate with industry peers to assess its relative
sensitivity to market movements within its sector. Industry comparisons can
provide additional context and validation for the beta estimate.
• Macro-Economic Factors:

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• Incorporate macro-economic variables such as interest rates, inflation, GDP

growth, and other relevant economic indicators that may influence the stock's
beta. Econometric techniques like vector autoregression (VAR) or dynamic
regression models can be used to capture these relationships.
• Stress Testing and Sensitivity Analysis:
• Conduct stress testing and sensitivity analysis to assess the robustness of the
beta estimate under different scenarios and market conditions. This can help
identify potential weaknesses or limitations in the estimation methodology.
• Expert Judgment:
• Supplement quantitative analysis with qualitative insights and expert judgment
from industry analysts, portfolio managers, or other market participants who
may have valuable insights into the stock's risk profile.

By implementing these strategies, investors and analysts can enhance the accuracy and reliability
of beta estimates, thereby improving their ability to assess and manage portfolio risk effectively.

ESTIMATING THE MARKET RISK PREMIUM.

Estimating the market risk premium is a crucial step in the Capital Asset Pricing Model (CAPM),
as it serves as the compensation investors require for taking on systematic risk (beta) in the market.
The market risk premium represents the excess return investors expect to receive from investing
in the market portfolio over and above the risk-free rate.

Methods commonly used to estimate the market risk premium:

Historical Returns Method:
This method estimates the market risk premium based on historical returns data. It calculates the
average annual return of the market portfolio (typically represented by a broad-based equity index
such as the S&P 500) over a long-term period (e.g., 10 or 20 years) and subtracts the average
annual return of a risk-free asset (such as Treasury bills) over the same period. The difference
represents the historical market risk premium.
Survey-Based Method:
In this approach, market participants, such as financial analysts or investment professionals, are
surveyed to provide their estimates of the future market risk premium. The survey responses are

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aggregated to derive an average market risk premium expectation. While this method relies on
subjective judgments, it can provide insights into market sentiment and expectations.
Implied Method:
The implied method infers the market risk premium from current market prices. It involves solving
the CAPM equation for the market risk premium, using observed market prices for individual
securities and the risk-free rate. By rearranging the CAPM equation, the market risk premium can
be calculated as the product of the market beta and the difference between the expected return of
the market portfolio and the risk-free rate.
Historical Equity Risk Premium Studies:
Academic studies and research reports often analyze historical equity risk premiums by examining
long-term data on stock returns, bond yields, and risk-free rates. These studies calculate the
historical average equity risk premium over various time periods and market conditions, providing
insights into the long-term relationship between equity returns and risk-free rates.
Macroeconomic Models:
Some economists and researchers develop macroeconomic models to estimate the market risk
premium based on economic fundamentals such as GDP growth, inflation expectations, and
interest rate levels. These models attempt to capture the relationship between macroeconomic
variables and asset returns to derive estimates of the market risk premium.
Analyst Forecasts:
Financial analysts and research firms may provide forecasts of the market risk premium based on
their outlook for economic and financial market conditions. These forecasts may be published in
research reports or investment outlooks and can serve as inputs for estimating future returns in
valuation models.

It's important to note that estimating the market risk premium involves uncertainty and is subject
to various assumptions and data limitations. Therefore, investors may use multiple methods or
conduct sensitivity analysis to assess the range of possible outcomes and make informed decisions
based on their risk preferences and investment objectives.

Additionally, the estimated market risk premium may vary depending on the time horizon, market
conditions, and underlying assumptions used in the analysis.

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CRITIQUES OF THE CAPITAL ASSET PRICING MODEL (CAPM):

1. Market Efficiency Assumption: CAPM assumes that markets are perfectly efficient,
meaning all available information is already reflected in asset prices. However, in reality,
markets are not always perfectly efficient, and anomalies or mispricing’s can occur.
2. Single-Factor Model: CAPM relies on a single factor, beta, to explain asset returns. Critics
argue that real-world asset pricing is more complex and cannot be adequately captured by
a single factor.
3. Risk-Free Rate Assumption: CAPM assumes a risk-free rate of return exists, typically
represented by government bonds. However, the actual risk-free rate may vary over time
and can be influenced by factors such as inflation and central bank policies.
4. Market Risk Premium Estimation: Estimating the market risk premium, which is a key
component of CAPM, can be subjective and vary depending on the methodology used.
Critics argue that different estimates of the market risk premium can lead to different
valuations of assets.
5. Empirical Evidence: Some empirical studies have found inconsistencies with CAPM
predictions, suggesting that other factors beyond beta may influence asset returns. These
factors include size, value, momentum, and quality, among others.
6. Assumptions of Homogeneous Expectations and Investors: CAPM assumes that all
investors have the same expectations and preferences, which may not hold true in practice.
In reality, investors have heterogeneous expectations, risk tolerances, and investment
objectives.
7. Lack of Consideration for Non-Market Risk: CAPM focuses primarily on systematic
risk (market risk) and may not adequately account for non-systematic risk (firm-specific
risk) that can be diversified away.
8. Time-Varying Betas: CAPM assumes that betas remain constant over time, which may
not hold true in practice. Betas can change due to shifts in company-specific factors, market
conditions, or economic variables.

Overall, while CAPM provides a useful framework for understanding the relationship between
risk and return, it has limitations and may not fully capture the complexities of asset pricing in
real-world financial markets. As a result, alternative models and approaches have been developed
to supplement or replace CAPM in certain contexts.

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SOLVED NUMERICAL - 01
Tata Power stock transacts on the Bombay Stock Exchange (BSE) and it has a beta of 1.75, The
risk-free rate is currently 5.7 % based on returns on 10-year. The stocks traded in the BSE with the
average market risk premium of 8.00%. Calculate the expected rate of return using CAPM model.
Also justify your answer if the beta value change to 2.5.
Answer
Given: Beta (β) = 1.75
Risk-free rate (rf) = 5.7%
Market risk premium (MRP) = 8.00 %
Using the CAPM formula:
E(R)=rf+β×MRP
Substituting the given values: 0.057+1.75×0.08
E(R) = 0.057+1.75×0.08
= 0.057+0.14
= 0.197
E(R) = 19.70%
So, the expected rate of return for Tata Power stock is 19.70%.
Now, let's calculate the expected rate of return if the beta value falls to 2.5:
Given: New Beta (β) = 2.5
Using the CAPM formula:
E(R)=rf+β×MRP
Substituting the given values: 0.057+2.5×0.08
E(R) = 0.057+2.5×0.08
= 0.057+0.20
= 0.257
E(R) =25.70%
• If the beta value falls to 2.5, the expected rate of return for Tata Power stock would be
25.70%.
• In summary, as the beta value increases, the expected rate of return also increases,
reflecting the higher risk associated with the stock. Conversely, if the beta value falls, the
expected rate of return decreases, indicating a lower risk profile for the stock.

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PRACTICE QUESTIONS
1. Company: Reliance Industries Limited (RIL)
• Beta: 1.45
• Risk-free rate: 6.2%
• Market risk premium: 7.5%
• Calculate the expected rate of return for Reliance Industries Limited using the CAPM
model.

2. Company: Infosys Limited

• Beta: 1.15
• Risk-free rate: 5.5%
• Market risk premium: 8.2%
• Calculate the expected rate of return for Infosys Limited using the CAPM model.

3. Company: HDFC Bank Limited

• Beta: 0.90
• Risk-free rate: 5.8%
• Market risk premium: 7.0%
• Calculate the expected rate of return for HDFC Bank Limited using the CAPM
model.

4. Company: Maruti Suzuki India Limited

• Beta: 1.75
• Risk-free rate: 5.9%
• Market risk premium: 6.8%
• Calculate the expected rate of return for Maruti Suzuki India Limited using the
CAPM model.

5. Company: Tata Consultancy Services (TCS)

• Beta: 1.20
• Risk-free rate: 5.6%
• Market risk premium: 7.9%
• Calculate the expected rate of return for Tata Consultancy Services using the CAPM
model.

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