Individual investors must be compensated for bearing risk. It seems intuitive that there should be a direct linkage between the risk of a security and its rate of return. Overall investors should be interested in securing the maximum return for a given level of risk, or the minimum risk for a given level of return. The concept of such risk-return analysis is the efficient frontier of Harry Markowitz (1952, 1959). If an investor can invest in a government security, which is backed by the taxing power of the Federal Government, then that government security is relatively risk-free. The 90-day Treasury bill rate is used as the basic risk-free rate.
CITATION STYLE
Guerard, J. B., Saxena, A., & Gultekin, M. (2021). Risk and Return of Equity and the Capital Asset Pricing Model. In Quantitative Corporate Finance (pp. 383–425). Springer International Publishing. https://doi.org/10.1007/978-3-030-43547-9_14
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