Chapter 6. Capital Asset Pricing Model

Capital Asset Pricing Model (CAPM) is probably the most widely used model in assets pricing. There are several reasons behind its popularity. First, it is quite simple since it is a one-factor linear model. Second, it is quite easy to implement this one-factor model. Any interested reader could download historical price data for a listed company and market index data to calculate return first, and then estimate the market risk for the stock. Third, this simplest one-factor asset pricing model could be served as the first model for other more advanced ones, such as Fama-French 3-factor, Fama-French-Carhart 4-factor, and Fama-French 5-factor models introduced in the next chapter (Chapter 7, Multifactor Models ...

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