1. Introduction CAPM was developed by William Sharpe, JohnLintner & Jan Mossin in 1960. An extension of the portfolio theory of Markowitz. It derives the relationship between the expectedreturn & the risk of individual securities.

2. Assumptions Investment decisions are made on the basis of risk-returnassessments. Purchases & sales by a single investor cannot affectprices. No transaction cost. No personal income taxes. Investors share homogeneity of expectation. 3. Efficient frontier with risklesslending & borrowing Investing in a combination of risk freeasset & risky assetsCBARf0Portfolio risk(p)PortfolioReturn(Rp) 4. Rm RFEg:E(R) 15% 7% 8% -W 60% 40%ReturnRC= WRm + (1-W) RfRC= (0.60) (15) + (0.40)(7)RC= 11.8 per centRiskc = wmc =(0.60)(8)= 4.8 per cent 5. Investors funds & the Risky portfolioIf weight is proportion of investors funds invested inthe risky portfolio, If w=1, the investors funds are fully committed to therisky portfolio. If w1, the investor is borrowing at the risk free rate &investing an amount larger than his own funds in therisky portfolio. 6. Calculation of the Risk & Return in alevered PortfolioRL= wRm (w-1)R fWhere,RL=return in the levered portfoliow=the proportion of investor's in the risky portfolioRm=return on the risky portfolioRf=the risk free borrowing rateL = wmAssuming w=1.25,RL= (1.25)(15) (0.25)(7)RL= 17 per centL= (1.25)(8) = 10 per cent 7. Efficient frontier with borrowing andlendingpB0ACRPRfBorrowingLending 8. Pricing of securities with CAPM CAPM can be used for evaluating the pricing ofsecurity.Where,P0= current market priceP1= estimated market price after one yearD1= anticipated dividend for the year 9. CAPM & security valuationCRQPNMLBASMLEstimatedReturn0 0.7 Beta2.001.0 1.30Rf 10. Prepared by; Shakthi FernandoBSc. Financial management(Special)-UndergraduateSabaragamuwa University of Sri Lanka Biyanka JayawardhanaBSc. Financial management(Special)-UndergraduateSabaragamuwa University of Sri Lanka 11. Thank You