Capital Asset Pricing
Model(CAPM)
TheCapital Asset Pricing Model(CAPM) is a
modelused to determine a theoretically appropriate
required rate of return of an asset, to make decisions
about adding assets to a well-diversified portfolio.
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Capital Asset Pricing Model (CAPM): A Comprehensive Guide, Lecture notes of Business Management and Analysis
this document is about the capital pricing model
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2019/2020
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Capital Asset Pricing
Model ( CAPM )
The Capital Asset Pricing Model ( CAPM ) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio.
CAPM formula and calculation CAPM is calculated according to the following formula: Where: Ra = Expected return on a security Rrf = Risk-free rate Ba = Beta of the security Rm = Expected return on market Note: “Risk Premium” = (Rm – Rrf)
The CAPM formula is used to calculate the expected return on investable asset. It is based on the premise that investors have assumptions of systematic risk (also known as market risk or non-diversifiable risk) and need to be compensated for it in the form of a risk premium – an amount of market return greater than the risk-free rate. By investing in a security, investors want a higher return for taking on additional risk.