Briefly explain three practical uses of the capital asset pricing model.

Advanced Financial Management Block Revision Mock Exams

The practical applications of capital asset pricing model (CAPM) are as follows: Determination of cost of capital e.g. cost of equity Ke = Rf + (Rm – Rf)Be
Be = equity beta factor
Valuation of securities comparing the expected and required returns if ER > Required return then the security is undervalued.
Capital budgeting decision is appraising the projects in terms of betas Gearing adjustment between levered and unlevered firm.

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