Abstract
The capital asset pricing model (CAPM) estimates the cost of capital as the sum of a risk-free rate and a premium for the risk of the particular security. In the theoretical version of the CAPM, the best proxy for the risk-free rate is the short-term government interest rate. The risk premium is the product of the premium required on an average-risk investment (called the “market risk premium” or MRP) and the relative risk of the security in question (called beta). The MRP cannot be directly observed nor can a security's true beta. Even the measure of the risk-free rate is subject to debate.
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