The risk and returns to capital assets can be quantified and calculated in monetary terms using different formulae. These calculations provide a very meaningful reference and managerial decision making tool for the analysis of such risks and returns so as to decide on which capital assets to invest in given alternative assets, for example land from two sellers with different expected cash inflows to be generated in the business.
Risk is measured using expected return and the actual return of the capital asset investment. The more the actual returns deviate from the expected returns (standard deviation) the higher the risk of investment in the capital asset. The standard deviation is an absolute measure of risk. Returns can also be calculated using the return on investment (ROI) and returns on assets (ROA) or the capital asset pricing model (CAPM) formulae.
CAPM= Risk free rate of return + beta sensitivity to market risk (market risk rate – risk free rate of return)
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