Capital Asset Pricing Model

Capital Asset Pricing Model

In finance, the capital asset pricing model (CAPM) is used to determine a theoretically appropriate required rate of return of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

The model was introduced by Jack Treynor (1961, 1962), William Sharpe (1964), John Lintner (1965a,b) and Jan Mossin (1966) independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. Sharpe, Markowitz and Merton Miller jointly received the Nobel Memorial Prize in Economics for this contribution to the field of financial economics.

Read more about Capital Asset Pricing Model:  The Formula, Security Market Line, Asset Pricing, Asset-specific Required Return, Risk and Diversification, The Efficient Frontier, The Market Portfolio, Assumptions of CAPM, Problems of CAPM

Famous quotes containing the words capital, asset and/or model:

    “The duty of government is to leave commerce to its own capital and credit as well as all other branches of business, protecting all in their legal pursuits, granting exclusive privileges to none.”
    —Andrew Jackson (1767–1845)

    “Imagination is a valuable asset in business and she has a sister, Understanding, who also serves. Together they make a splendid team and business problems dissolve and the impossible is accomplished by their ministrations.... Imagination concerning the world’s wants and the individual’s needs should be the Alpha and Omega of self-education.”
    —Alice Foote MacDougall (1867–1945)

    “If the man who paints only the tree, or flower, or other surface he sees before him were an artist, the king of artists would be the photographer. It is for the artist to do something beyond this: in portrait painting to put on canvas something more than the face the model wears for that one day; to paint the man, in short, as well as his features.”
    —James Mcneill Whistler (1834–1903)