
Capm   • See Capital Asset Pricing Model.    Embedded terms in definition   Asset pricing model Asset Capital asset pricing model Capital asset Capital
   Referenced Terms   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 riskfree 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 riskfree or riskless rate of return. Typically, this riskfree 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.
  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 riskfree 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 riskfree or riskless rate of return. Typically, this riskfree 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.
  Expected return beta relationship: Implication of the Capm that security risk premiums will be proportional to beta.
  Mutual fund theorem: A result associated with the Capm, asserting that investors will choose to invest their entire risky portfolio in a marketindex or mutual fund.
  Required return: The minimum return required by investors given the risk of an investment and the riskfree rate and the marketdetermined premium for risk. The required return is that rate of return predicted by the Capm (capital asset pricing model) formula.The minimum expected return you would require to be willing to purchase the asset, that is, to make the investment.
   Related Terms   Multifactor capm


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