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The AMA Handbook of Financial Risk Management by John J. HAMPTON

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Chapter9Risk and Required Return

The relationship between risk and return is developed in a framework called the capital asset pricing model. The model offers a theory and a methodology for evaluating any investment decision in which capital is committed for the purpose of earning future profits. The model was first proposed domestically in the United States by Sharpe, Lintner, Miller, and Modigliani, and then by others in the 1960s, and is fully developed today.

In its purest form, the capital asset pricing model is a comprehensive theory of risk and return relationships in perfect markets. It makes such assumptions as rational behavior on the part of all investors; a highly competitive environment for investing, where all investors know the ...

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