The Capital Asset Pricing Model (CAPM) is one of the primary financial measures used by banks to determine how assets are performing. The CAPM is used to determine the expected security return which equals the risk free rate of return plus Beta times the expected market
risk premium (RM-RF).
r = RF+ Beta x (RM-RF)
Consider the following scenario:
Western Bank and Trust owns several physical properties in three western states. The bank wants to measure its return but is concerned about market risk (Beta). Write a 750-report that provides a recommendation for using or not using the CAPM. Make sure to address the following:
Is this measurement a good indicator of an assets performance? Why or why not?
In your response, be sure to define the following:
- Risk-free rate of return
- Beta (as a risk measure)
- Expected market risk premium