The capital asset pricing model - or CAPM - is a financial model that calculates the expected rate of return for an asset or investment. CAPM does this by using the expected return on both the market and a risk-free asset, and the asset's correlation or sensitivity to the market (beta).
What are the three components of CAPM?
This is the capital asset pricing model (CAPM). The expected return on a risky asset thus has three components. The first is the pure time value of money (Rf), the second is the market risk premium, [E(Rm) - Rf], and the third is the beta for that asset, Bi.
How do you do CAPM analysis?
CAPM stand for Capital Asset Pricing Model and is a common valuation method for stocks. What is CAPM? The Capital Asset Pricing Model, or CAPM, calculates the value of a security based on the expected return relative to the risk investors incur by investing in that security.
Is CAPM a valuation method?
Advantages of the CAPM It is generally seen as a much better method of calculating the cost of equity than the dividend growth model (DGM) in that it explicitly considers a company's level of systematic risk relative to the stock market as a whole.