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Capital asset pricing model |
Also found in: Acronyms, Wikipedia, Hutchinson | 0.13 sec. |
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Capital asset pricing model (CAPM) An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the asset's systematic risk. Theory was invented by William Sharpe (1964) and John Lintner (1965). The early work of Jack Treynor is was also instrumental in the development of this model. How to thank TFD for its existence? Tell a friend about us, add a link to this page, add the site to iGoogle, or visit webmaster's page for free fun content. |
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The most commonly accepted method in finance is the capital asset pricing model (CAPM). Beginning with the 2006 price setting, the Board will use only a capital asset pricing model (CAPM) to determine a return on equity (ROE) that reflects the return earned by private-sector service providers. The capital asset pricing model (CAPM), first introduced by Sharpe (1964) and Lintner (1966), has made a profound impact on the way investors understand the relationship between price and risk of capital assets. |
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