Capital Asset Pricing Model, Capital Asset Pricing Model Formula, and Meaning

The Capital Asset Pricing Model (CAPM) was developed in 1964 by American scholars William Sharpe, John Lintner, Jack Treynor and Jan Mossin on the basis of portfolio theory and capital market theory. The relationship between the expected rate of return of assets in the market and risk assets, and how equilibrium is formed, is the backbone of modern financial market theory, which is widely used in investment decision-making and corporate finance.

The capital asset pricing model assumes that all investors invest according to Markowitz's asset selection theory, with the same estimate of expected return, variance, covariance, etc., and investors are free to borrow. Based on this assumption, the focus of capital asset pricing model research is to explore the quantitative relationship between the return of risk assets and risk, that is, how much return should investors receive in order to compensate for a certain degree of risk.

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Introduction to the Capital Asset Pricing Model.

Model formula e(ri) = rf + im(e(rm)-rf). Capital asset pricing model.

is an American expert in portfolio theory and capital markets in 1964.

Developed on the basis of theory, it mainly studies the relationship between the expected return on assets and risk assets in the market. The capital asset pricing model is also the backbone of modern financial market theory, and is widely used in investment decision-making and corporate finance industries.

Extended Information:1The capital asset pricing model assumes that all investors invest according to Markowitz's asset selection theory, with a positive understanding of expected returns and covariance.

The estimates are exactly the same, and investors are free to borrow. Based on this assumption, the focus of the capital asset pricing model is to explore the quantitative relationship between the return and risk of a risky asset, simply compensating for a given degree of risk, how high should an investor receive a rate of return? When the capital market reaches equilibrium, the marginal risk** remains unchanged, and the marginal effect of any portfolio investment that changes the market.

It's all the same, i.e. the compensation for adding one unit of risk is the same. In press beta.

Defining the basic conditions for the introduction of an equilibrium market, we can obtain the formula of the capital asset pricing model e(ri)=rf + im(e(rm)-rf).

2.For single**, the expected yield is determined by the risk-free rate.

and risk compensation. Risk premium.

The size depends on the beta value. The higher the beta, the higher the risk of a single ** and the higher the compensation required. Beta measurement is also a single ** system risk, and there is no risk compensation for non-system risk.

The Capital Asset Pricing Model (CAPM) was proposed by American scholars William Sharp, John Lintner, Jack Treynor and Jan Mossin in 1964 on the basis of portfolio theory and capital market theory. It mainly studies the relationship between the expected rate of return of assets and risk assets in the market, and how equilibrium is formed. It is the backbone of modern financial markets** theory and is widely used in investment decision-making and corporate finance.

3.The capital asset pricing model assumes that all investors invest according to Markowitz's theory of asset selection, that the estimated returns, variance, and covariance are exactly the same, and that investors are free to borrow money. Based on this assumption, the focus of the capital asset pricing model is to explore the quantitative relationship between the return and risk of a risk asset, i.e., how much return an investor should receive to compensate for a particular degree of risk.

The greatest contribution of the <> capital asset pricing model is that it provides a substantive representation of the relationship between risk and return, and the capital asset pricing model for the first time expresses the intuitive understanding of "high return accompanied by high risk" in such a simple relation.

By far the capital asset pricing and distribution model is the most appropriate expression of the relationship between risk and return in reality.

Disadvantages of the Capital Asset Pricing Model:

It is difficult to estimate the value of certain assets or enterprises, especially for some emerging industries that lack historical data.

The uncertainty and constant change of the economic environment make it inevitable that the value estimated based on historical data will inevitably be reduced in guiding the future [Hops - Tongjitang].

The capital asset pricing model is based on a series of assumptions, some of which deviate greatly from the actual situation, which calls into question the effectiveness of the capital asset pricing model. These assumptions include: the market is equilibrium, there is no friction in the market, market participants are rational, there are no transaction fees, and taxes do not affect the selection and trading of assets.

Fundamentals of the Capital Asset Pricing Model:

r=rf+β×rm—rf)

r denotes the necessary rate of return on an asset;

Indicates the risk coefficient of the asset's system;

RF stands for Risk-Free Yield, which is usually approximated by the interest rate on short-term Treasury bonds;

rm stands for market portfolio yield, which is usually replaced by the average of the **** index yield or the average yield of all **; (RM-RF) is called market risk premium.

1. The market is complete, and there are no transaction costs and taxes.

2. All assets are infinitely divisible.

3. Investors are all risk-averse, and when other conditions are the same, they will choose risky assets with a small standard deviation.

4. Investors evaluate the price of cherry potatoes according to the expected rate of return and variance of the ** portfolio during the investment period.

5. All investors have the same expectations for the expected rate of return and variance of various risk assets.

6. The interest rate on borrowing in the capital market is the same for all investors.

7. The ending value of all assets is always greater than or equal to zero, and all investors pursue the maximization of the expected utility of the ending wealth.

8. The investment period of investors is the same.

9. The market information is open and complete, and investors can obtain the chain for free and in a timely manner.