Time Value of Money
Annuities
Perpetuities
Kinds of Interest Rates
Future Value of an Uneven Cash flow
Probability Distribution
Standard Deviation
CAPM
Security Market Line
Bond Valuation
Stock Valuation
Cost of Capital
The Balance Sheet
Capital Budgeting
Control Your Credit
Weather
Financial Terms
Financial Charts
Fuel Mileage
Energy Efficiency
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The Security Market Line
The formula for CAPM is Ks = Krf + B ( Km - Krf).
Let's assume that the risk free rate is
5%, and the overall stock market will produce a rate of
return of 12.5% next year. You see that XYZ company (Read
our disclaimer) has a beta of 1.7
I f you make a graph of this situation, it would look like this:
- On the horizontal axis are the betas of all companies in the market
- On the vertical axis are the required rates of return, as a percentage
The red line is the Security Market Line.
How did we get it? We plugged in a few
sample betas into the equation
Ks = Krf +
B ( Km - Krf).
| Security | Beta (measures risk) | Rate of Return |
| 'Risk Free' | 0.0 | 5.00% |
| Overall Stock Market | 1.0 | 12.50% |
| XYZ Company | 1.7 | 17.75% |