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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 .
Assumptions and limitations of the CAPM model CAPM is criticized for its many unrealistic assumptions, and investors must understand the assumptions underlying the CAPM to accurately understand ...
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 ...
In finance, arbitrage pricing theory ( APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, [ 1] it is widely believed to be an improved alternative to its predecessor, the capital asset pricing model (CAPM ...
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 .
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).
Discounted cash flow. The discounted cash flow ( DCF) analysis, in financial analysis, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management, and patent valuation.