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Capital Asset Pricing Model

A model that attempts to describe the relationship between the risk and the expected return on an investment that is used to determine an investment's appropriate price. The assumption behind the CAPM is that money has two values: a time value and a risk value. Thus, any risky asset or investment must compensate the investor for both the time his/her money is tied up in the investment and the investment's relative riskiness. This compensation must be in addition to the risk-free rate of return. There are a number of variations on the CAPM, notably the multifactor CAPM and the two-factor model. The CAPM is calculated according to the following formula:

ra = rf + Betaa(rm - rf)


ra is the asset price,
rf is the risk-free rate of return,
Betaa is the risk premium, and

rm is the market rate of return.


References in periodicals archive ?
The predominant attacks on CAPM have been empirical in nature, leaving the underlying theory virtually unscathed.
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Pouvons-nous nous rejouir de ces chiffres en nous felicitant que les Marocains s'intoxiquent moins aux medicaments ou devons-nous nous inquieter de la faiblesse de nos statistiques et de la faible implication des professionnels de sante et des citoyens a declarer les cas d'intoxications au CAPM ?
Construction ofj6k6 price momentum strategy and estimation of CAPM.
In addition, we estimate the CAPM version of Equation (7) to gauge the impact of the size and value effects.
The results suggest that the conditional Fama and French three factor model has performed better than the conditional CAPM when news asymmetry was taken into account compared with the unconditional Fama and French three factor model and the unconditional dual-beta CAPM in explaining the relationship in beta and returns in case of Pakistani market.
1) under the framework of Fisher's hypothesis and real CAPM.
uCertify has updated its CAPM PrepKit to incorporate 150 additional questions that cover these new objectives, along with an updated version of the corresponding eBook (online version) and chapter wise study guide.
This approach is essential to understanding corporate investment and risk CAPM is overly simple: some risky stocks outperform others for reasons unrelated to market performance, such as small capitalization and high book-value-to-price ratios.