Defining the Potential Yield Direction of the Shares on the Zagreb Stock Exchange Using the Security Market Line ? SML

One of the best theoretical models for determining the risk premium of individual securities is a model for determining the cost of invested capital, or CAPM. According to the CAPM model, the expected rate of return demanded by investors depends on the risk-free rate of return and the risk premium that depends on the beta coefficient of individual stocks and the risk premium for investing in the stock market. The relationship between risk and expected rate of return on a security is linear and can be represented by the security market line (SML). Points of the SML represent the expected returns on individual securities, with different beta coefficients. According to the CAPM all expected returns must lie on the SML. The reason for this is in proportional risk premium according to the beta coefficient of the security. Securities will be regarded as potentially attractive or undervalued, i.e., unattractive or overvalued depending on the expected return of individual securities calculated using the CAPM model which will show them as being above or below the SML. The aim of this paper is to determine which shares of the official index of Zagreb Stock Exchange, may be considered attractive or unattractive investment.