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TABLE OF CONTENTS Abstract.....................................................................1 Introduction.................................................................2 CAPM........................................................................3 Discussion..................................................................5 Conclusion..................................................................7 References..................................................................8 Appendix....................................................................10 ABSTRACT One analytical framework that seems to be mostly suitable to the analysis of the problem of exchange risk is the well-known Capital Asset Pricing Model (CAPM). CAPM is a two parameter, single period model that focuses on the expected return of an asset and the asset's riskiness. It is essentially a utility based valuation model that posits a linear relationship between the returns of an asset and the market risk premium. The essence of CAPM was its first successful effort to illustrate the access of the risk of the cash flow, from a potential investment project and to estimate the projects cost of capital, and the expected rate of return, so the investors would demand if they choose or decide to invest in the project. The CAPM is a valuation model that combines considerations...

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