The Capital Asset Pricing Model (CAPM) is a mathematical model that offers an explanation of the relationship between investment risk and return. By dividing the covariance of an asset's return by the market variance, it is possible to determine the value of an asset. To ascertain the risk level of a particular asset, the market is evaluated as a whole. Unlike the DCF model, the time value of money is not considered. This model assumes that investors understand the risk involved and trade without costs. Two types of risk are associated with the CAPM model: unsystematic and systematic. Unsystematic risks are company-specific risks. For example, the value of an asset may increase or decrease due to changes in senior management or bad publicity. To prevent total loss, the model suggests diversification. Systematic risk is due to general economic uncertainty. The market compensates investors for taking systematic risks but not for taking specific risks. This is because the specific risk can be diversified. Systematic risk can be measured using beta. For example, let's say a stock has a beta of 0.8. The market has an expected annual return of 0.12 and the risk-free rate is 0.02. Then the stock has an expected one-year return of 0.10.E( ) = 0.02 + 0.8[0, 12 – 0.02] = 0.10According to the CAPM, the value of an asset fluctuates due to unpredictable economic changes. The basis of the CAPM is that the risk of an asset is measured by the variance of its return over future periods. (McCullough, 2005) Assets with β < I will exhibit less extreme average return movements than the overall market, while those with > I will exhibit larger yield fluctuations than the overall market. All other risk measures are not important. CAMP works best for long-term investments.Ki = the required return on the asset iRf = risk-free rate of return on a US Treasury billβi = beta coefficient or non-diversifiable risk index for the asset ikm = the return of the market portfolio of assetsThe discounted cash flow (DCF) method summarizes the company's cash flow to reflect the time value of money. It can be used to evaluate or compare investments or purchases. Unlike the CAPM, the DCF uses the concept of present value. It proposes the idea that money invested today should be worth more than money received in the future. Therefore, the value of money received in the future is discounted to reflect its lower value.