**Capital asset pricing model formula**4

**What is Capital asset pricing model?**

The capital assets pricing model (CAPM) favors a form to calculate the expected payback of an asset-based on the period value of money and the risk of systematic investment. It is basically used in funds to price the risk of **MSME Collateral**3 and return on that investment when seeing the cost of capital and the risk.

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**Risks are of two types:**

• Systematic risk, and

• Unsystematic risk

**Systematic risk is also known as market risk. It is essential to the market exclusively.**

**Systematic risk consists of:**

- Interest rate risk
- Exchange rate risk
- Purchasing power risk
- Market risk

**Unsystematic risk is also known as specific risk and diversifiable risk. It is an uncertainty of financing in the industry. **

- Unsystematic risk consists of:
- Financial risks, and
- Business risk
- Given below is the formula of Capital Asset Pricing Model

ERi = βi(ERm-Rf)

Where,

ERi = return of the investment

Rf = risk – free rate

βi = beta of investment

ERm = return of the market

(ERm – Rf) = to calculate the market risk premium, we have to subtract the risk-free rate from the expected return of the investment.

The advantages of CAPM involve the accounts of systematic risks and it can be understandable and can be used easily.