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# Understanding the Theory of Capital Asset Pricing Model

The theory of the Capital Asset Pricing Model - CAPM is pretty basic This theory though it seems very small is a very important part of the business world The expected return on a long futures position depends on the Beta of that individual futures contract If the Beta is greater than 0 the futures price should rise over time If the Beta is equal to 0 the futures price should remain the same over time If the Beta is less than 0 the futures price should decline over time The Capital Asset Pricing Model - CAPM shows risk in a particular asset With the Capital Asset Pricing Model - CAPM traders can avoid much of the risk they receive because this broadens their chances Therefore only unavoidable risk should or will be compensated Nevertheless even after a trader expands his portfolio some risk will remain Because some risk is associated with the market as a whole this risk cannot be countered through expanding In other words no matter how hard a trader tries to avoid risk some risk will remain This is just a fact of a matter and will not and cannot be changedThe Beta measures the risk associated with one particular asset in relation to the overall market Beta also measures how much a stock tends to change in price relative to the market as a whole based on the last 60 months of market Therefore with a Beta of zero the return should be zero A Beta above zero should bring a positive return to a long position And a Beta below zero should bring a negative return on a long position For example a beta coefficient of one would mean that the market and the given stock tend to move the same So a five percent move in the market should produce a five percent move in the stock A beta coefficient of two will fluctuate twice as

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