UNIVERSITY OF SOUTH AFRICA
College of Economic and Management Sciences
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FIN4801: Advanced Financial Management
Assignment 2 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIN4801
Module Code:
Advanced Financial Management
Module Name:
Assignment 2 (35 Marks)
Assignment:
2
Assignment Number:
35
Total Marks:
Submitted in partial fulfilment of the requirements
for Advanced Financial Management — UNISA 2026
,UNISA | FIN4801 Assignment 2 – 2026
================================================================
Question 1: Market Risk Premium in CAPM
The Capital Asset Pricing Model (CAPM) is a foundational tool in corporate finance that
links expected asset returns to systematic risk (Brealey, Myers and Allen, 2023). Central
to the model is the concept of the market risk premium, which quantifies the compensation
investors demand for bearing market-wide risk.
1.1 Definition of the Market Risk Premium
The market risk premium is the additional return that investors require for investing in the
market portfolio rather than holding a risk-free asset. It represents the reward for accepting
systematic, or non-diversifiable, risk that cannot be eliminated through portfolio diversifica-
tion (Ross, Westerfield and Jordan, 2022).
1.2 The CAPM Formula
The full CAPM formula is expressed as follows:
Re = Rf + β · (Rm − Rf ) (1)
Where:
• Re = Expected cost of equity (required return on the asset)
• Rf = Risk-free rate of return
• β = Beta coefficient (measure of systematic risk)
• (Rm − Rf ) = Market Risk Premium (highlighted)
• Rm = Expected return on the market portfolio
The market risk premium is therefore defined as:
Market Risk Premium = Rm − Rf (2)
Page 2 of 22
, UNISA | FIN4801 Assignment 2 – 2026
Key Distinction
Market Risk Premium vs. Risk-Free Rate: The risk-free rate (Rf ) compensates
investors for the time value of money alone, typically proxied by a government treasury
yield. The market risk premium (Rm − Rf ) is the additional return above this base-
line, compensating investors specifically for bearing undiversifiable market risk. Only
systematic risk earns a premium under CAPM.
Page 3 of 22
College of Economic and Management Sciences
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIN4801: Advanced Financial Management
Assignment 2 — Semester 1, 2026
⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄ ⋄⋄
FIN4801
Module Code:
Advanced Financial Management
Module Name:
Assignment 2 (35 Marks)
Assignment:
2
Assignment Number:
35
Total Marks:
Submitted in partial fulfilment of the requirements
for Advanced Financial Management — UNISA 2026
,UNISA | FIN4801 Assignment 2 – 2026
================================================================
Question 1: Market Risk Premium in CAPM
The Capital Asset Pricing Model (CAPM) is a foundational tool in corporate finance that
links expected asset returns to systematic risk (Brealey, Myers and Allen, 2023). Central
to the model is the concept of the market risk premium, which quantifies the compensation
investors demand for bearing market-wide risk.
1.1 Definition of the Market Risk Premium
The market risk premium is the additional return that investors require for investing in the
market portfolio rather than holding a risk-free asset. It represents the reward for accepting
systematic, or non-diversifiable, risk that cannot be eliminated through portfolio diversifica-
tion (Ross, Westerfield and Jordan, 2022).
1.2 The CAPM Formula
The full CAPM formula is expressed as follows:
Re = Rf + β · (Rm − Rf ) (1)
Where:
• Re = Expected cost of equity (required return on the asset)
• Rf = Risk-free rate of return
• β = Beta coefficient (measure of systematic risk)
• (Rm − Rf ) = Market Risk Premium (highlighted)
• Rm = Expected return on the market portfolio
The market risk premium is therefore defined as:
Market Risk Premium = Rm − Rf (2)
Page 2 of 22
, UNISA | FIN4801 Assignment 2 – 2026
Key Distinction
Market Risk Premium vs. Risk-Free Rate: The risk-free rate (Rf ) compensates
investors for the time value of money alone, typically proxied by a government treasury
yield. The market risk premium (Rm − Rf ) is the additional return above this base-
line, compensating investors specifically for bearing undiversifiable market risk. Only
systematic risk earns a premium under CAPM.
Page 3 of 22
