CHAPTER 7

Framework for Investing: The Capital Asset Pricing Model (CAPM)

Although finance and investing have existed as long as there have been markets to connect suppliers of capital (savers) with those who need capital (businesses), the beginnings of a rigorous framework for appraising and designing portfolios did not really come into being until the mid-twentieth century. The Capital Assets Pricing Model (CAPM) is one of the most influential models developed to address this. Merton Miller, Franco Modigliani, and William Sharpe shared a Nobel Prize in Economics in 1990 for their development of the CAPM.

To jump ahead for a moment, one of the core implications of CAPM when combined with the Efficient Markets Hypothesis (EMH), which will be ...

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