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Topic: Capital asset pricing model


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In the News (Sat 25 May 19)

  
  CAPM - Capital Asset Pricing Model
CAPM is based on the idea that investors demand additional expected return (called the risk premium) if they are asked to accept additional risk.
The CAPM model says that this expected return that these investors would demand is equal to the rate on a risk-free security plus a risk premium.
Implication: The model is a one period model.
www.valuebasedmanagement.net /methods_capm.html   (591 words)

  
 CAPM - Capital Asset Pricing Model
CAPM was introduced by Treynor ('61), Sharpe ('64) and Lintner ('65).
The CAPM model says that the expected return that the investors will demand, is equal to: the rate on a risk-free security plus a risk premium.
A consequence of CAPM thinking is that it implies that investing in individual stocks is useless, because one can duplicate the reward and risk characteristics of any security just by using the right mix of cash with the appropriate asset class.
www.12manage.com /methods_capm.html   (752 words)

  
 Capital asset pricing model   (Site not responding. Last check: 2007-10-14)
The capital asset pricing model ('''CAPM''') is used in finance to determine a theoretically appropriate price of an asset such as a security.
The formula takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), in a number often referred to as beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
The model assumes the existence of a risk-free rate, that all investors have access to the risk-free rate, and that there is no limit to the amount that may be borrowed or lent at this amount, although these Assumptions may be relaxed with more complicated versions of the model.
capital-asset-pricing-model.iqnaut.net   (1312 words)

  
 Capital Asset Pricing Model   (Site not responding. Last check: 2007-10-14)
The Capital Asset Pricing Model is essentially the reduction of Modern Portfolio Theory into a single factor model—with that single factor being called Beta.
CAPM is used as a model for the pricing of risky assets.
CAPM is attributed to William Sharpe, who shared in the Nobel Prize for Economics for his work.
www.quanthome.com /Quantitative-Finance/Articles/Capital-Asset-Pricing-Model   (402 words)

  
 Session 9: Capital Asset Pricing Model   (Site not responding. Last check: 2007-10-14)
The capital asset pricing model is an attractive to the dividend valuation model and dividend growth model as a method as a model as a method of establishing the cost of equity.
The CAPM can be used not only to estimate the expected returns from securities with differing risk characteristics, but also to predict the value of shares, using the dividend valuation model.
The arbitrage pricing model (APM) is a model that was developed out of the CAPM and considers various numbers of independent factors which may affect the share price.
cbdd.wsu.edu /kewlcontent/cdoutput/TOM505/page42.htm   (1476 words)

  
 Capital Asset Pricing Model (CAPM)
CAPM extended Harry Markowitz's portfolio theory to introduce the notions of systematic and specific risk.
We call CAPM a "capital asset pricing model" because, given a beta and an expected return for an asset, investors will bid its current price up or down, adjusting that expected return so that it satisfies formula [1].
Accordingly, the CAPM predicts the equilibrium price of an asset.
www.riskglossary.com /articles/capital_asset_pricing_model.htm   (765 words)

  
 capital asset pricing model (CAPM)
The capital asset pricing model (CAPM) is an equilibrium model which describes the pricing of assets, as well as derivatives.
The model concludes that the expected return of an asset (or derivative) equals the riskless return plus a measure of the assets non-diversiable risk ("beta") times the market-wide risk premium (excess expected return of the market portfolio over the riskless return).
Unfortunately, The CAPM is more difficult to implement in practice than the binomial option pricing model or the Black-Scholes formula because to price an asset it requires measurement of the asset's expected return and its beta.
www.in-the-money.com /glossarynet/capital_.htm   (307 words)

  
 Capital Asset Pricing Model (CAPM) - Definition   (Site not responding. Last check: 2007-10-14)
Equation in modern portfolio theory expressing the idea that securities in the market are priced so that their expected return will compensate investors for their expected risk.
The risk factor beta is calculated in terms of the chosen asset class.
CAPM is used theoretically, to relate securities to the market as a whole, and practically, as the discount rate in discounted cash flow calculations to establish the fair value of an investment.
moneychimp.com /glossary/capm.htm   (108 words)

  
 Capital asset pricing model - Wikipedia, the free encyclopedia
The capital asset pricing model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk.
The CAPM formula takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), in a number often referred to as beta (╬▓) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.
The model was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory.
en.wikipedia.org /wiki/Capital_asset_pricing_model   (1863 words)

  
 SSRN-The Capital Asset Pricing Model: Theory and Evidence by Eugene Fama, Kenneth French
The capital asset pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birth of asset pricing theory (resulting in a Nobel Prize for Sharpe in 1990).
Before their breakthrough, there were no asset pricing models built from first principles about the nature of tastes and investment opportunities and with clear testable predictions about risk and return.
Four decades later, the CAPM is still widely used in applications, such as estimating the cost of equity capital for firms and evaluating the performance of managed portfolios.
papers.ssrn.com /sol3/papers.cfm?abstract_id=440920   (517 words)

  
 The Capital Asset Pricing Model: An Overview
Here we look at the formula behind the model, the evidence for and against the accuracy of CAPM, and what CAPM means to the average investor.
The capital asset pricing model was the work of financial economist (and, later, Nobel laureate in economics) William Sharpe, set out in his 1970 book "Portfolio Theory And Capital Markets".
Investors can tailor a portfolio to their specific risk-return requirements, aiming to hold securities with betas in excess of 1 while the market is rising, and securities with betas of less than 1 when the market is falling.
www.investopedia.com /articles/06/CAPM.asp   (1237 words)

  
 Giddy/NYU Foundations of Finance Course   (Site not responding. Last check: 2007-10-14)
The efficient frontier of risky assets is the graphical representation of the set of portfolios that maximizes portfolio expected return for a given level of portfolio standard deviation.
The level of systematic risk in a particular asset, relative to average, is given by the beta of that asset.
The CAPM assumes ideal security markets in the sense that: (a) markets are large, and investors are price takers, (b) there are no taxes or transaction costs, (c) all risky assets are publicly traded, and (d) any amount can be borrowed and lent at a fixed, risk-free rate.
www.stern.nyu.edu /~igiddy/capm.htm   (924 words)

  
 SAS/ETS Examples -- Fitting a Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) is one of the most common methods of relating the sensitivity of an individual company's stock return to the return of the market as a whole.
Failure to reject would imply that the movement of asset prices of a particular company is the same as that of the market as a whole.
Estimating a model for a particular firm requires data on the market rate of return (typically a composite index such as the S&P 500 or the Dow Jones Industrial Average), the risk-free rate of return (usually a short-term Treasury bill), and stock returns from the company of interest.
support.sas.com /rnd/app/examples/ets/capm/index.htm   (1133 words)

  
 The Capital Asset Pricing Model (via CobWeb/3.1 planetlab1.isi.jhu.edu)   (Site not responding. Last check: 2007-10-14)
In the hypothetical world of the CAPM theory all that the investor bothers about is the values of the normal distribution.
Assume further that all assets are perfectly divisible and priced in a perfectly competitive marked.
Furthermore, there is a definite number of assets and their quantities are fixed within the one period world.
www.encycogov.com.cob-web.org:8888 /A2MonitorSystems/AppA2MonitorSystems/AppBtoA2CAP_model/CAP_Model.asp   (1549 words)

  
 » Quantitative Finance Home «   (Site not responding. Last check: 2007-10-14)
Two common approaches to the pricing of derivatives are the risk-neutral pricing framework and the differential equations approach.
The volatility of the price of the underlying asset is constant over the life of the option.
The formula in essence assumes that the size of the next move in the asset's price is known, but the direction is not.
quanthome.com /.../Articles/Capital-Asset-Pricing-Model   (1110 words)

  
 FinanceProfessor's notes on CAPM, BETA,
When a Risk free asset is included in the model we can draw a line from the RF rate to the MVE we have what is called a capital allocation line (CAL).
Those assets that fall below the line are overpriced (they offer too low of return for their risk), while those above the line are underpriced.
When the assumptions hold, CAPM is the only measure of risk that is needed to determine the expected return of an asset.
www.financeprofessor.com /488/notes/capm.htm   (814 words)

  
 CAPM (Capital Asset Pricing Model) Calculator (via CobWeb/3.1 planetlab1.isi.jhu.edu)   (Site not responding. Last check: 2007-10-14)
Valuation with the Capital Asset Pricing Model uses a variation of discounted cash flows; only instead of giving yourself a "margin of safety" by being conservative in your earnings estimates, you use a varying discount rate that gets bigger to compensate for your investment's riskiness.
There are different ways to measure risk; the original CAPM defined risk in terms of volatility, as measured by the investment's beta coefficient.
The idea is that investors require higher levels of expected returns to compensate them for higher expected risk; the CAPM formula is a simple equation to express that idea.
www.moneychimp.com.cob-web.org:8888 /articles/valuation/capm.htm   (386 words)

  
 Capital Asset Pricing Model. CAPM   (Site not responding. Last check: 2007-10-14)
Capital Asset Pricing Model (CAPM) forms a theoretical basis for a number of various financial technologies for yield and risk management, used for medium and long-term investing in stocks.
Though this model is a simplified presentation of the financial market, many large investment businesses use it in their activities: for example, Merrill Lynch and Value Line.
According to the model, the risk associated with investment in any risky financial instrument, could be broken into two types: systematic and non-systematic.
www.finflowholdings.com /ffh/capm.shtml   (641 words)

  
 A Portfolio Selection and Capital Asset Pricing Model, from Universit├á Carlo Cattaneo - Business White Papers, ...
To highlight the peculiarities of the model, the main steps in the development of the standard CAPM are briefly reviewed.
The standard CAPM is extended so as to supply the price of each capital asset and explain the risk premium offered by the market as a whole.
The resulting CAPM can be used to perform a "what if" analysis and compare different capital market equilibria reflecting different values of the risk free interest rate and the price of risk.
industries.bnet.com /whitepaper.aspx?docid=122069   (484 words)

  
 SSRN-General Capital Asset Pricing Model (GCAPM) - A Microeconomic Theory of Investments by Stephen Fan
It shows that, under the new light, CAPM paradigms are alive and well, independent of its framework and assumptions.
In its Mathematical Appendix, GCAPM provides first-hand, closed-form derivations of modern finance paradigms, a new set of asset pricing theorems, and various forms of capital asset pricing models from the perspective of competitive capital market equilibrium.
It also proposes a new Canonical Capital Asset Pricing Model, which supports for Sharpe's (1988-95) return-based style analyses and enhances CAPM's two asset-pricing portfolios into a set of market-driven canonical asset-pricing portfolios.
papers.ssrn.com /sol3/papers.cfm?abstract_id=286815   (384 words)

  
 MPPM540: Chapter 6
Like the CAPM, it argues that discount rates are based upon the systematic risk exposure of the security, as opposed to the total risk.
Shares of asset A may be purchased for $100 and they are expected by everyone to be worth $150 at the end of the year.
If the CAPM is a "one size fits all" model of investing, the APT is a "tailor-made suit." In the APT world, people can and do have different tastes and care more or less about specific factors.
viking.som.yale.edu /will/finman540/classnotes/class6.html   (1896 words)

  
 Capital Asset Pricing Model   (Site not responding. Last check: 2007-10-14)
Unsystematic risk, which is also called firm-specific or diversifiable risk, is the portion of an asset's total risk that can be eliminated by including the security as part of a diversifiable portfolio.
The Capital Asset Pricing Model (CAPM) provides an expression which relates the expected return on an asset to its systematic risk.
The market portfolio is the most diversified portfolio possible as it consists of every asset in the economy held according to its market portfolio weight.
nalu.hpu.edu /mlane/BusinessFinanceOnline/RR/CAPM.html   (466 words)

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