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Quantitative Corporate Finance pp 337–364Cite as

Risk and Return on Equity and the Capital Asset Pricing Model

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Abstract

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.

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Authors and Affiliations

  1. McKinley Capital Management, Inc., 3301 C. Street, Anchorage, Alaska, 99503, USA

    John B. Guerard Jr

  2. Department of Economics, Lehigh University, 621 Taylor Street, Bethlehem, PA, 18015, USA

    Eli Schwartz

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  1. John B. Guerard Jr
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  2. Eli Schwartz
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Guerard, J.B., Schwartz, E. (2007). Risk and Return on Equity and the Capital Asset Pricing Model. In: Quantitative Corporate Finance. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-34465-2_14

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