Solution

The CAPM compensates investors for the time value of their money. In theory, the risk-free interest rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate. In practice, risk free rate does not exist because even the safest investments carry a very small amount of risk. However, the long-term G-sec rate is used as a proxy to risk-free rate of return (in India 10-year G-sec rate is used as risk free rate).