Conclusion

In a nutshell, the capital asset pricing model (CAPM) is a model that connects a security's systematic
risk to the projected return on that investment. Systematic risk, also known as market risk or non-
diversifiable risk, is a component of overall risk produced by market conditions that influence all
businesses and is beyond any company's or entity's control. Inflation, political turmoil, conflict,
currency value fluctuations, and so on are examples of market forces. Even with a well-diversified
portfolio, systemic risk cannot be eliminated, and all assets are subject to it.
The sensitivity or responsiveness of a stock's return to the overall market return is evaluated by beta,
which is the sensitivity or responsiveness of the stock's return to the overall market return. Stocks
with a beta larger than 1 are highly sensitive to the market and, as a result, have a higher market
covariance. They grow faster than the other equities in a bull market. In a bad market, however, they
also fall quicker. As a result, they are dangerous. Because investors need to be rewarded for the
degree of risk they are taking, the expected return for these companies would be greater. Stocks with a
beta of less than one, on the other hand, are regarded as less volatile. As a result, the expected returns
on these equities are often smaller.
For the research, Apple (AAPL), Tesla (TSLA), Amazon (AMZN), and Netflix, Inc. (NFLX) are the
four US-listed equities that we have chosen. The betas for each listed stock are 1.22, 1.89, 1.16, and
0.71 respectively and the expected returns are 16.57%, 25.63%, 15.75%, and 9.67% respectively.
From the betas itself, we can see that Netflix, Inc. has the smallest beta and the beta is less than 1,
which means the stock is less risky and less volatile, but it generates a lower expected return. While
the other 3 companies, have betas greater than 1, indicating that they are risky stocks with higher
volatility but generate higher expected returns compared to Netflix, Inc. If we equally weighted the
portfolio for these 4 companies, the portfolio beta also greater than 1 which is 1.245 with an expected
return of 16.9%. From these findings, we can conclude that when the stocks are combined into a
portfolio, the risk remains significant because the beta is greater than 1. Although it will increase their
overall portfolio risk, it will give them the possibility to generate more money.