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An estimation of the CAPM and the security market line (purple) for the Dow Jones Industrial Average over 3 years for monthly data. In finance, the capital asset pricing model ( CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio .
William Forsyth Sharpe (born June 16, 1934) is an American economist. He is the STANCO 25 Professor of Finance, Emeritus at Stanford University 's Graduate School of Business, and the winner of the 1990 Nobel Memorial Prize in Economic Sciences . Sharpe was one of the originators of the capital asset pricing model (CAPM).
Modern portfolio theory ( MPT ), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning ...
The capital asset pricing model (CAPM) is a financial model used to determine a security’s expected return considering its associated risk. Developed in the 1960s, CAPM has become an essential ...
The consumption-based capital asset pricing model (CCAPM) is a model of the determination of expected (i.e. required) return on an investment. [1] The foundations of this concept were laid by the research of Robert Lucas (1978) and Douglas Breeden (1979). [2] The model is a generalization of the capital asset pricing model (CAPM). While the ...
Roll's critique. Roll's critique is a famous analysis of the validity of empirical tests of the capital asset pricing model (CAPM) by Richard Roll. It concerns methods to formally test the statement of the CAPM, the equation. This equation relates an asset's expected return to the asset's sensitivity to the market portfolio return .
[6] Here asset prices jointly satisfy the requirement that the quantities of each asset supplied and the quantities demanded must be equal at that price - so called market clearing. These models are born out of modern portfolio theory, with the capital asset pricing model (CAPM) as the prototypical result.
Security market line ( SML) is the representation of the capital asset pricing model. It displays the expected rate of return of an individual security as a function of systematic, non-diversifiable risk. The risk of an individual risky security reflects the volatility of the return from the security rather than the return of the market portfolio.