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Investments are exposed to two types of risk: systematic and unsystematic. Systematicrisks are uncontrollable marketrisks due to unavoidable external factors. Systematicrisks include interest rates, economic fluctuations, political unrest, pandemics, etc. E(r) = Rf + ??(Rm
It quantifies an asset’s risk relative to the market. Beta’s limitations include its reliance on historical data, potential inability to capture short-term fluctuations and company-specificrisks, and sensitivity to benchmark choice. Different indices may yield different beta values for the same asset.
10] , [23] , [2] Discount Rate: The rate used to discount future cash flows is typically the cost of equity, calculated via the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-Free Rate + Beta * MarketRisk Premium. [23] 23] Risk-Free Rate: Tied to government bond yields (e.g.,
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