Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return of an asset. It is based on the idea that investors require a higher return to compensate for additional risk. The model takes into account the risk-free rate of return, the expected market return, and the asset’s beta. The beta is a measure of the asset’s volatility relative to the market. The CAPM is used to calculate the expected return of an asset, and is used by investors to determine whether an asset is worth investing in.
History of the CAPM
The CAPM was developed by economist William Sharpe in 1964. It was an attempt to explain the relationship between risk and return in the capital markets. The model was based on the idea that investors require a higher return to compensate for additional risk. The CAPM is still widely used today, and is considered to be one of the most important models in finance.
Comparison of CAPM and Other Models
| Model | Risk-free Rate | Expected Market Return | Asset’s Beta |
|---|---|---|---|
| CAPM | Yes | Yes | Yes |
| Arbitrage Pricing Theory (APT) | Yes | No | No |
| Multi-Factor Model | Yes | Yes | No |
Summary
The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return of an asset. It takes into account the risk-free rate of return, the expected market return, and the asset’s beta. The CAPM is still widely used today, and is considered to be one of the most important models in finance. For more information about the CAPM, please visit Investopedia, The Balance, or the Financial Times.
See Also
- Arbitrage Pricing Theory (APT)
- Multi-Factor Model
- Risk-Free Rate
- Expected Market Return
- Beta
- Portfolio Theory
- Modern Portfolio Theory (MPT)
- Sharpe Ratio
- Treynor Ratio
- Jensen’s Alpha
