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Capital Asset Pricing Model

Summary

The Capital Asset Pricing Model (CAPM) is a financial model used to determine the expected return on an investment, based on its systematic risk and the potential return of the market.

Detailed Description

CAPM establishes a relationship between the expected return of an asset and its risk, measured by beta, which indicates how much the asset's price is expected to move relative to market movements. The formula for CAPM is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). This model helps investors assess whether an investment’s potential return justifies its risk, plotting the expected return against the risk introduced into a diversified portfolio.

Category
Finance

Impact Details

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Investment Decision Making

Investors use CAPM to compare the expected returns of multiple investment opportunities.

Industries:

Finance
Investments

Platforms:

Stock Market
Bond Market
Real Estate
Corporate Finance

Companies use CAPM to evaluate the cost of equity and make strategic investment assessments.

Industries:

Corporate
Investment Banking

Platforms:

Financial Modelling Software

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