46
Capital asset pricing model
The capital asset pricing model (or CAPM, as it is universally known) estimates the expected return for a firm’s stock. The calculation uses the prevailing risk-free rate, the stock’s trading history and the return that investors are expecting from owning shares.
When to use it
- To estimate the price you should pay for a security, such as a share in a company.
- To understand the trade-off between risk and return for an investor.
Origins
CAPM was developed by William Sharpe. In 1960, Sharpe introduced himself to Harry Markowitz, inventor of ‘modern portfolio theory’ (see Chapter 48), in search of a doctoral dissertation topic. Sharpe decided to investigate portfolio theory, and this led him to a novel way of ...
Get Key MBA Models now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
