Capital Asset Pricing Model (CAPM)



Since all rational investors (including management) interested in wealth maximisation should be concerned with individual security or project risk relative to the stock market as a whole, portfolio analysts are quick to appreciate the importance of systemic(market) risk.. It represents the only risk that they are willing to pay a premium to avoid.


Using this information and the assumptions of perfect markets with opportunities for risk - free investments, the required return on a risky investment was therefore redefined as the risk-free return, plus a premium for risk. This premium is not determined by the total risk of the investment, but only by its systemic (market) risk.


Of course, the systematic risk of an individual financial security ( a company's share), might be higher or lower than the overall risk f the market within which it is listed. Likewise, the systematic risk fr some projects may differ from others within an individual company, and this is where the theoritical development of the beta factor and the Capital Asset Pricing Model (CAPM) fit into portfolio analysis.


In this course we will be covering more topics on CAPM as highlighted below:


  •  The Systemic Risk and Unsystemic Risks

  •  The Security Market Line.

  •  The Capital Asset Pricing Model.

  •  The Relations between CAPM and SML.

  •  Criticism of CAPM.

  •  Capital Budgeting and the  CAPM,

  •  The estimation of Projects Betas.

  •  Modigliani-miller and the CAPM.

  •  Arbitrage Pricing Theory and Beyond.


This course is a must read for anyone who wants to understand the concept of determining the value of asset investments individually or as a company.




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