CAPITAL ASSET PRICING MODEL - CAPM

A model that characterize the connection between expected and risk return and that is used in assessing the financial value of risky securities.

The main concept of the CAPM or Capital Asset Pricing Model is that investors need to be paid in two ways: time worth of risk and money. The time worth of a currency is symbolized by the risk-free (rf) rate in the equation and pays the investors for entrusting their funds in any investment over a particular time span. The other half of the equation symbolized risk and computes the value of earnings that the investor needs for getting on additional risk. This is computed by getting a risk measure (beta) that scrutinize the returns of the goods to the market over a time span and to the market premium (Rm-rf).

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