What does CAPM tell us?
Understand the Problem
The question is asking about the Capital Asset Pricing Model (CAPM) and what insights or information it provides regarding investment risk and expected returns. CAPM is a financial model that examines the relationship between the risk of an asset and its expected return based on its systematic risk (beta) compared to the market as a whole.
Answer
CAPM calculates the expected return by using market return, a risk-free return, and the asset's beta.
The final answer is that CAPM calculates the expected rate of return for an asset by using the expected return on the market, a risk-free asset, and the asset's beta.
Answer for screen readers
The final answer is that CAPM calculates the expected rate of return for an asset by using the expected return on the market, a risk-free asset, and the asset's beta.
More Information
CAPM helps investors understand the relationship between risk and return and is widely used in finance to price risky securities.
Sources
- What Is CAPM - Capital Asset Pricing Model - Formula, Example - corporatefinanceinstitute.com
- What Is the Capital Asset Pricing Model (CAPM)? - Investopedia - investopedia.com
- How Do I Use the CAPM to Determine Cost of Equity? - Investopedia - investopedia.com
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