Accounting Question.. $**$Capital Asset Pricing Model $($CAPM$)**$

The Capital Asset Pricing Model $($CAPM$)$ is a financial model that helps determine the expected return on an investment based on its systematic risk. It provides a framework for calculating the appropriate required rate of return for an investment by considering the risk$-$free rate, the market risk premium, and the asset's beta.

$**$Key Components of CAPM:$**$

$1.**$Risk$-$Free Rate:$**$ The risk$-$free rate represents the return an investor can earn by investing in a risk$-$free asset, such as government bonds. It serves as a baseline for measuring the expected return on a risky investment.

$2.**$Market Risk Premium:$**$ The market risk premium is the additional return that investors expect to earn for taking on the risk of investing in the overall market. It reflects the compensation investors require for bearing the systematic risk associated with investing in the market as a whole.

$3.**$Beta:$**$ Beta measures the systematic risk of an investment relative to the overall market. It indicates how sensitive the investment's returns are to changes in the market. A beta of $1$ implies that the investment moves in line with the market, while a beta greater than $1$ indicates higher volatility, and a beta less than $1$ suggests lower volatility.

$**$Calculation of Expected Return:$**$

The expected return on an investment can be calculated using the CAPM formula:

Expected Return $=$ Risk$-$Free Rate $+($Beta $\backslash$times Market Risk Premium$)$

The CAPM formula assumes that investors are rational and risk$-$averse, seeking higher returns for taking on additional risk. It provides a standardized approach for pricing risky assets and helps investors make informed investment decisions.

$**$Question:$**$

Which of the following components is used to measure the systematic risk of an investment in the Capital Asset Pricing Model $($CAPM$)?$

A$)$ Risk$-$Free Rate B$)$ Market Risk Premium C$)$ Beta D$)$ Expected Return

Please choose the correct option from the choices provided.