Important Points for IC 99 - Asset Management Exam
Page 82 Of 109
Go to:
Efficient market refers to the existence of competitive market where financial securities and assets are traded (purchase and sale) with complete information of investors in respect of risk and return on all securities available in the market.
This model advocates that there must be risk premium which is the minimum amount of money by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to induce investors to hold the risky asset rather than the risk-free asset.
Greater the ?, higher is the risk premium on equity investment. Thus risk premium that a stock should earn is ? times of risk premium from the stock market.
Security Market Line is the graphical presentation of CAPM. This line shows the rate of return required to compensate at a given point of risk. In a graph Y axis represents Risk Premium and X represents ?. If risk premium is plotted or Y and ?? on X, we will get an upward sloping line which is created by the Risk Premium (R? - R_f).
Risk free rate of return forms part of the required rate of return on security. It requires proper analysis for computing the Beta Value and Risk free rate of return for determining the required rate of return.
MODELEXAM® 
www.realsoftinfoplan.com