Capital Asset Pricing Model

The term capital asset pricing model is used to define a model which describes the relationship between the return expected from a security and the risks associated with it. It was introduced by William Sharpe, Jack Treynor, John Linther and Jan Mossin. This model is basically used to determine the value of risky securities. According to the CAPM model, the return you expect from a security or a portfolio must be equal to the rate on a security that is risk free as well as a risk premium. If the expected return fails to equal or beat the required return, an investor should not undertake the investment. With the help of the CAPM model, investors can calculate the expected return from a particular stock. In this model the quantity beta is used to define the sensitivity of the asset to systematic risk or market risk. This model also finds its use in tackling a variety of financial situations.

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Edited and Updated 31st May 2014

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