Capital Asset Pricing Model (CAPM)
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Breifly describe the capital asset pricing model (CAPM), its practical use, and its limitations.
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Response describes the use of Capital Asset Pricing Model (CAPM)
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CAPM Model
According to Investopedia.com, the Capital Asset Pricing Model (CAPM) "describes the relationship between risk and expected return and is used in the pricing of risky securities". The formula used for CAPM is shown below:
Ke= Rf+B*(Km-Rf)
Where:
Ke = Required return on common stock
Rf = Risk-free rate of return; usually the current rate on Treasury bill ...
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