The Capital Asset Pricing Model

This model evaluates a stock's rate of return as follows:

rate_of_return = risk_free_interest_rate + Beta X 8.7

For the risk_free_interest_rate, we use the rate for three month treasury bills, which typically ranges between 4% and 8%, depending on the rate of inflation.

The value of Beta is a measure of the risk associated with the particular stock, and is derived by measuring the average change of the stock's price compared to the change in the market as a whole.

The value 8.7 is the average expected return of the market above the risk-free interest rate, measured over a 50 year period of time.

Detailed discussion and analysis of the Capital Asset Pricing Model can be found in the references in the bibliography.

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