Capital Asset Pricing Model
Also written CAPM · Capital Asset Pricing Model (CAPM)
The dominant model for valuing risky assets and estimating required return, developed concurrently in the early 1960s by Jack Treynor (1962), William Sharpe (1964), John Lintner (1965) and Jan Mossin (1966).
This one is not written up yet
The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.
Written up from the same chapter
- Alpha returnThe return a portfolio earned over and above what CAPM says was required for the market risk it took — the part of performance not explained by the market.
- BenchmarkThe independently published index a scheme's performance is measured against, chosen to match its investment objective, asset allocation and strategy, and disclosed in the Scheme Information Document.
- BetaHow sharply a share moves relative to the market index — beta 1 moves with the index, above 1 amplifies it, below 1 dampens it. The standard measure of systematic risk.
- Bottom-up approachSizing a market by taking the revenue of individual companies and aggregating it upward — accurate where companies disclose, blind where they do not.
- Credit riskThe risk that a borrower fails to meet its obligations on a debt instrument — the risk credit rating agencies exist to grade, and the one that triggers a segregated portfolio in a mutual fund.
- Discounted Cash FlowA valuation method that estimates the cash a business will generate in future years and converts each year back to what it is worth today.
Where this is taught
- Series XIX-E · Chapter 3: Introduction to Modern Portfolio Theory and Capital Market Theoryintroduced here
- Series X-A · Chapter 16: Portfolio Performance Measurement and Evaluationintroduced here
- Series XIX-C · Chapter 5: Introduction to Capital Market Theoryintroduced here
- Series XIX-A · Chapter 11: Valuationintroduced here
Related terms
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