12. Measuring risk (S9.1) Look again at Table 9.1. This time we will concentrate on Union Pacific. Page 271 a. Calculate Union Pacific's cost of equity from the CAPM using its own beta estimate and the industry beta estimate. How different are your answers? Assume a risk-free rate of 2% and a market risk premium of 7%. b. Can you be confident that Union Pacific's true beta is not the industry average? c. Under what circumstances might you advise Union Pacific to calculate its cost of equity based on its own beta estimate?

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Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.