ABIBLO FINANCE - CAPM
CAPM is also known as Capital Asset Pricing Model.
CAPM is a statistical model which is used to describe the average return and expected return on an investment.
The return consists of a risk premium and risk free rate return. The risk premium is the risk which cannot be avoided while holding the market portfolio.
CAPM is based on the equation :
E(Ri) = Rf + βi [E ( Rm ) - RF ]
E(Ri) = expected or average return on the assets in portfolio.
Rf = risk free rate of return
E(Rm) = expected / average return on all asset
βi = Beta coefficient of the asset
The beta = percentage that the return in i will change in Rm.
CAPM is a measurement of the risk in the portfolio or asset. CAPM is the basic for measuring the required return on an investment and used for calculating the discount rate for a net present value calculation.
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