CAPM Model PDF

Canadian University of Dubai The Capital Asset Pricing Model (CAPM) Facilitator: Dr. Elgilani Elshareif, Ph.D.; ACCA; CA Professor of Finance and Accounting The Capital Asset Pricing Model (CAPM)  estimates the expected return on an investment given its systematic risk...

Canadian University of Dubai The Capital Asset Pricing Model (CAPM) Facilitator: Dr. Elgilani Elshareif, Ph.D.; ACCA; CA Professor of Finance and Accounting The Capital Asset Pricing Model (CAPM)  estimates the expected return on an investment given its systematic risk. Rs = Rf + βs (Rm – Rf) where: Rs = the stock’s expected return (and the company’s cost of equity capital). Rf = the risk-free rate. Rm = the expected return on the stock market as a whole. β s = the stock’s beta. https://www.youtube.com/watch?v=-fCYZjNA7Ps CAPM describes how the betas relate to the expected rates of return. The key insight of CAPM is that investors will require a higher rate of return on investments with higher betas. Risk and Return for Portfolios Containing the Market and the Risk —Free Security Legend: Blank Blank Blank % Market % Risk-Free Portfolio Beta, Expected Portfolio Portfolio, WM Asset, Wrf βPortfolio Return, E(rPortfolio) 0% 100% 0.0 6.0% 20% 80% 0.2 7.0% 40% 60% 0.4 8.0% 60% 40% 0.6 9.0% 80% 20% 0.8 10.0% 100% 0% 1.0 11.0% 120% −20% 1.2 12.0% Using the CAPM to Estimate the Expected Rate of (rAsset j ) rf   Asset j [E (rMarket )  rf ] EReturn Implications: Higher the systematic risk of an investment, other things remaining the same, the higher will be the expected rate of return an investor would require to invest in the asset. Applications: Real life cases Thank You