Every investment comes with a certain degree of risk, attached to it.

For example, the fixed deposits may see a decline in interest rates, real estate might lose value, or the stocks purchased might witness capital erosion.

The additional income or the rate of return earned from an investment compensates an investor for the risk he undertakes.

That is, the higher the risk, the higher the return the stock has to pay back, to become a rational investment.

So, it can be understood that the concept of risk and return go hand in hand. Let’s discuss Capital Asset Pricing Model.