Derive the Capital Asset Pricing Model (CAMP) and also discuss the assumptions that are necessary in the development of the CAPM. Explain how CAMP related to portfolio theory. Discuss managerial applications of CAPM.

Capital Asset pricing model is a primary model for the determination of the expected rate of return associated with a particular asset and it will only ascertain the systematic risk in respect to a particular asset because it assumes that all the securities are having only systematic risk in form of Beta so it will be derived as follows-

Expected rate of return= Risk free rate+( Beta X Market Risk Premium)

There will be various types of assumptions which will be needed in order to derive the Capital Asset pricing model and it will be assumed that all the investors are having similar expectations and it will also assume that all the portfolio in the market is completely diversify and so there will be only systematic risk in nature and it will also assume that market is highly efficient in nature.

Capital Asset pricing model is related to the portfolio theory because Capital Asset pricing model will be trying to perform a risk adjusted return and it will be trying to to help the investor in deriving the expected rate of return by elimination of all the unsystematic risk and Portfolio because the unsystematic risk in the portfolio will be reflecting that it is to be adjusted in order to diversify the portfolio so Capital Asset pricing model already assume that all the unsystematic risks are eliminated.

Managerial application of Capital Asset pricing model are generally associated with driving the rate of return of various investment which is to be made in the market after adjustment of the risk and it will help the manager for selecting best project for maximizing the rate of return.