Thursday, January 27, 2011

CAPM - Capital Asset Pricing Model


The linear relationship between the return required on an investment (whether in stock market securities or in business operations) and its systematic risk is represented by the CAPM formula.

Formulae Sheet:

E(ri) = Rf + βi(E(rm) - Rf)

E(ri) = return required on financial asset i

Rf = risk-free rate of return

βi = beta value for financial asset i

E(rm) = average return on the capital market

The CAPM is an important area of financial management. In fact, it has even been suggested that finance only became ‘a fully-fledged, scientific discipline’ when William Sharpe published his derivation of the CAPM in 1986


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