What is CAPM model in simple words?
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 does the CAPM model assume?
The CAPM assumes that the risk-return profile of a portfolio can be optimized—an optimal portfolio displays the lowest possible level of risk for its level of return.
What are the components of the CAPM model?
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.
What is CAPM model PDF?
The capital asset pricing model (CAPM) is an influential paradigm in financial risk management. It formalizes mean-variance optimization of a risky portfolio given the presence of a risk-free investment such as short-term government bonds.