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Risk-based pricing is a methodology adopted by many lenders in the mortgage and financial services industries. It has been in use for many years as lenders try to measure loan risk in terms of interest rates and other fees.
In financial economics, asset pricing refers to a formal treatment and development of two interrelated pricing principles, [1] [2] outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset ...
Performance-based pricing increases the risk of the seller but it creates opportunities for greater rewards. Sellers who use this pricing strategy have an advantage in attracting customers. Performance-based pricing has fewer chances to work if the desired outcome is not clearly defined and quantified between the two parties. [19]
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.
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). [2]
In Rosenberg's model the risk indices X consisted of industry weights and risk indices. Each asset would be given an exposure to one or more industries, e. g. based on breakdowns of the firms balance sheet or earning statement into industry segments. These industry exposures would sum to 1 for each asset.
Financial risk modeling is the use of formal mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's accounting ledger of tradeable financial assets, or of a fund manager's portfolio value; see Financial risk management.
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 ...