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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 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.

 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.

 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 market-index or mutual fund.

 Required return: The minimum return required by investors given the risk of an investment and the risk-free rate and the market-determined 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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