Explain the main conclusions of the CAPM

Main conclusions of Capital Asset pricing model are that-

A. The expected rate of return will be reflecting the rate of return which will be demanded by the investor after ascertainment of the beta of the particular company.

B. It will also indicate that beta will only reflect the systematic risk and all the portfolios will be fully diversified.

C. It is a one factor model and all the risk will be discounted through beta.

D. It will also assume that all the investors are exposed to similar risk and they have similar level of expectations from similar stocks.

Equation for the security market line-

Expected rate of return=risk free rate of return+(Beta(market rate of return-risk free rate)

Security market line is reflecting the risk adjusted return according to Capital Asset pricing model after discounting of the beta in the overall rate of return so those stocks who are plotting over security market line will be reflecting that they have discounted all the risk and they are trading closer to their Capital Asset pricing model price and hence they will be fairly valued because they are reflecting their expected rate of return and hence they should be plotting exactly on the security market line.