In the CAPM model, the expected return is expressed

Solution

• In the Capital Asset Pricing Model (CAPM), the risk-free rate (Rₓ) is the minimum return an investor expects for providing capital without assuming any additional risk. • It compensates only for the time value of money—the idea that money available today is worth more than the same amount in the future due to its earning potential. • The risk premium [β(Rm – Rf)] compensates for the systematic risk (market risk) associated with the investment. • In practice, a true risk-free asset does not exist, but long-term government securities (like the 10-year G-sec in India) are used as proxies.