Flashcards in CAPM Deck (3)
What is CAPM?
Capital Asset Pricing Model
What does CAPM do?
Shows that both efficient and inefficient assets can be priced (measuring expected return for risk), using the E[Ri]=Rf+Betai(E[Rm]-Rf)
Rf is the risk-free rate
E[Rm] is the expected return on the market portfolio
E[Rm]-Rf is the market risk premium
Betai is the beta of the asset, Betai=COV(Ri,Rm)/VAR(Rm)
What does beta measure?
It measures the asset’s exposure to the market