ERi = Rf + βi (ERm- Rf)

Eri = Expected return of investment or security
Rf = Risk-free rate
βi = Beta of the investment or security
ERm = Expected return of the market
(ERm - Rf) = Market risk premium


Beta measures the risks in the stocks that have been invested. If a stock is riskier than the market, then the beta will be higher than one. If a stock has less risk, then the beta will be less than one.

This is the favorite interviewer question in banking interview questions.

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