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The capital asset pricing model (CAPM) is a theoretical framework that attempts to explain the relationship between risk and return for long-term investments. It is a key concept in modern portfolio theory and is widely used by financial professionals to estimate the required return for an investment asset.
r = rF + β(rM - rF)
Overall, CAPM is a powerful tool for understanding the relationship between risk and return. However, it has limitations and should not be used in isolation.
What is the Capital Asset Pricing Model (CAPM)?
CAPM is a financial model that calculates the expected return on an asset based on its risk level compared to the overall market.
What is the purpose of CAPM?
CAPM is used to determine a fair return on an investment, helping investors assess whether an asset’s return justifies its risk.
Why is the CAPM model important?
CAPM helps investors make informed decisions by evaluating expected returns relative to risk, aiding in portfolio management and asset selection.
What are the key components of the CAPM equation?
The CAPM equation includes the risk-free rate, beta (which measures asset risk relative to the market), and the market risk premium.
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