Capital Asset Pricing Model
The concept introduces the CAPM term and its components and looks at the theory, advantages and disadvantages of the model. You will understand how CAPM can be used to estimate the cost of equity by introducing the asset beta formula.
Capital Asset Pricing Model Definition
The capital asset pricing model (CAPM) is a model for pricing an individual security or portfolio of stocks and determine the expected returns on capital investments. CAPM provides a methodology for quantifying risk and translating that risk into estimates of expected return on equity (Mullins, 1982). It is a simple model that relates both variables by means of a linear relationship of the form y=a+bx, where b is called the 'beta coefficient', a measure of the stock risk relative to the market risk.
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Capital Asset Pricing Model References (4 of up to 20) *
- Baker, H.K. (2011) Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects. John Wiley and Sons.
- Brealey, R.A., Myers, C. (2003) Capital Investment and Valuation. McGraw-Hill Professional.
- Darrat, A.F., Li, B., Park, J.C. (2011) 'Consumption-based CAPM models: International Evidence'. Journal of Banking & Finance, 35(8), pp.2148-2157.
- Golec, J.H., Vernon, J.A. (2007) Financial Risk in the Biotechnology Industry. NBER Working Paper No. 13604.
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