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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.
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).
[10] [11] The CAPM, for example, can be derived by linking risk aversion to overall market return, and restating for price. [9] Black-Scholes can be derived by attaching a binomial probability to each of numerous possible spot-prices (i.e. states) and then rearranging for the terms in its formula. See Financial economics § Uncertainty.
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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). [2] APT is founded upon the law of one price , which suggests that within an equilibrium market, rational investors will implement arbitrage such that the equilibrium price is eventually ...
CAPM may refer to: Capital asset pricing model, a fundamental model in finance; Certified Associate in Project Management, an entry-level credential for project managers
In essence, this is how much the company paid to borrow $200,000. It was the cost of raising $200,000 of new capital. So to raise $200,000 the company had to pay $100,000 out of their profits; thus we say that the cost of debt in this case was 50%.