According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return.

The CAPM suggests that expected return is a function of (1) the pure time value of money, (2) the reward for bearing systematic risk, and (3) the amount of systematic risk present in a particular asset. Better students will point out that both the pure time value of money and the reward for bearing systematic risk are exogenously determined and can change on a daily basis, while the amount of systematic risk for a particular asset is determined by the firm's decision-makers.