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The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). It is a measure of the center of the distribution of the random variable that is the return. [1] It is calculated by using the following formula: [] = = where
( ()) is the market premium, the expected excess return of the market portfolio's expected return over the risk-free rate. A derivation [ 14 ] is as follows: (1) The incremental impact on risk and expected return when an additional risky asset, a , is added to the market portfolio, m , follows from the formulae for a two-asset portfolio.
Formally, the CCAPM states that the expected risk premium on a risky asset, defined as the expected return on a risky asset less the risk free return, is proportional to the covariance of its return and consumption in the period of the return. The consumption beta is included, and the expected return is calculated as follows: [4]
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.
An investor who is highly risk averse will hold a portfolio on the lower left hand of the frontier, and an investor who isn’t too risk averse will choose a portfolio on the upper portion of the frontier. Figure 2: Risk-return indifference curves. Figure 2 shows the risk-return indifference curve for the investors.
The "expected shortfall at q% level" is the expected return on the portfolio in the worst % of cases. ES is an alternative to value at risk that is more sensitive to the shape of the tail of the loss distribution. Expected shortfall is also called conditional value at risk (CVaR), [1] average value at risk (AVaR), expected tail loss (ETL), and ...
In the idealized CAPM, beta risk is the only kind of risk for which investors should receive an expected return higher than the risk-free rate of interest. [3] When used within the context of the CAPM, beta becomes a measure of the appropriate expected rate of return.
According to this model, the return of any stock can be decomposed into the expected excess return of the individual stock due to firm-specific factors, commonly denoted by its alpha coefficient (α), the return due to macroeconomic events that affect the market, and the unexpected microeconomic events that affect only the firm.