Nov 222019
 

The capital asset pricing model has been widely used for many years by the global financial services industry to try and predict the returns you should expect from a stock. If a stock offers a return above that predicted by CAPM you should buy it and vice versa. The starting point for a stock’s expected return is the minimum ‘risk free’ return an investor should expect from medium-dated AAA government bonds, say 5%. You then add a premium, because stocks in general are riskier than bonds. This figure is heavily debated, but let’s say it is 3%. Now you adjust that extra premium for a stock’s specific beta, say 1.2. So the expected CAPM return here would be 8.6% (5% + (3% x 1.2)). If you expect the stock you are reviewing to deliver, say, a 10% annual return, then it’s a buy, says CAPM.

For more on Capital asset pricing model (CAPM), banking definitions and financial terms please come back soon, and bookmark this article using one of the nice icons below.

Context

Do you have an example of where Capital asset pricing model (CAPM) can be used in context. Help me develop the site by leaving an example below. Every example using ‘Capital asset pricing model (CAPM)’ gets you another entry into the draw for 100 GBP of Amazon vouchers.

A winner will be selected on [date].

 Leave a Reply

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

(required)

(required)