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Capital asset pricing model

• Abbreviated CAPM. The basic theory that links together risk and return for all assets. The CAPM predicts a relationship between the required return, or cost of common equity capital, and the nondiversifiable risk of the firm as measured by the beta coefficient.

• Abbreviated CAPM. An economic theory that describes the relationship between risk and expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium.

• Is a tool that relates an asset's expected return to the market's expected return. It combines the concepts of efficient capital markets with risk premiums. The idea of capital market efficiency assumes immediate instantaneous -response to perfect or near perfect information. The risk premiums relate an investment to the market's risk-free or riskless rate of return. Typically, this risk-free rate is viewed in terms of principal safety for short term U.S. government obligations. Here, beta relates the volatility of an asset to the market.

 
 

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 Embedded terms in definition
 Assets
Asset
Beta coefficient
Beta
Capital market efficiency
Capital market
Capital
Capm
Common equity
Cost of common equity
Diversifiable risk
Diversification
Efficiency
Efficient capital market
Equity capital
Equity cap
Equity
Expected return
Firm
Market
Nondiversifiable risk
Plus
Portfolio
Premium
Principal
Rate of return
Required return
Return
Risk premium
Riskless rate
Risk
Securities
Security
Short
Systematic risk
Systematic
U
Volatility
 
 Related Terms
 
Administrative pricing rules
After tax proceeds from sale of old asset
Arbitrage free option pricing models
Arbitrage pricing theory
Asset
Asset activity ratios
Asset allocation
Asset allocation decision
Asset allocation fund
Asset and asset allocation
Asset and liability management
Asset backed securities
Asset backed security
Asset based financing
Asset classes
Asset coverage test
Asset for asset swap
Asset pricing model
Asset substitution
Asset substitution problem
Asset swap
Asset turnover
Average cost of capital
Baumol model
Best pricing
Binomial option pricing model
Black option model
Black scholes option model
Black scholes option pricing model
Business model eps projection
Capital
Capital account
Capital adequacy
Capital allocation decision
Capital appreciation
Capital asset
Capital budget
Capital budgeting
Capital cost allowance
Capital expenditure
Capital flight
Capital gain
Capital gains yield
Capital impairment rule
Capital lease
Capital loss
Capital market
Capital market efficiency
Capital market imperfections view
Capital market line
Capital rationing
Capital stock
Capital structure
Capital surplus
Change in net working capital
Complete capital market
Constant growth dividend valuation gordon model
Constant growth model
Cost of capital
Cost of limited partner capital
Cost of new asset
Debt capital
Debt to capital ratio
Dedicated capital
Discounted dividend model
Dividend discount model
Dividend growth model
Dividend valuation model
Dynamic asset allocation
Efficient capital market
Equity capital
Exchange rate risk capital budgeting
Factor model
Financial or capital lease
Fixed asset
Fixed asset turnover
Fixed asset turnover ratio
Garmen kohlhagen option pricing model
Gigo garbage in, garbage out in capital budgeting
Gordon model
Hard capital rationing
Ho lee option model
Human capital
Incremental cost of a new asset
Index model
Installed cost of new asset
Intangible asset
Invested capital
Issued share capital
Legal capital
Limitation on asset dispositions
Liquid asset
Marginal cost of capital
Marginal cost of capital schedule
Market model
Miller orr model
Net asset value
Net working capital
Net working capital recapture
Nondiversifiability of human capital
Opportunity cost of capital
Optimal capital structure
Option adjusted spread model
Other capital
Outstanding share capital
Pecking order view of capital structure
Perfect capital market
Perfect market view of capital structure
Personal tax view of capital structure
Pie model of capital structure
Planned capital expenditure program
Policy asset allocation
Pricing efficiency
Pro forma capital structure analysis
Proceeds from sale of old asset
Quick asset ratio
Real capital
Real options capital budgeting
Regulatory capital
Regulatory pricing risk
Risk capital budgeting
Risk free asset
Riskless or risk free asset
Risky asset
Simple linear trend model
Single factor model
Single index model
Soft capital rationing
Sophisticated approaches to capital budgeting
Static theory of capital structure
Tactical asset allocation
Tangible asset
Target capital structure
Taxable capital gain
Total asset turnover
Total capital
Two factor model
Two state option pricing model
Underlying asset
Uniform net capital rule
Value at risk model
Variable growth model
Venture capital
Wasting asset
Weighted average cost of capital
Working capital
Working capital management
Working capital ratio
Yield curve option pricing models
Zero growth model

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