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The Capital Asset Pricing Model: CAPM

In: Lecture Notes in Investment Investment Fundamentals

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  • Eliezer Prisman

Abstract

The capital asset pricing model (CAPM) is an equilibrium model. Its conclusions are based on equilibrium analysis, among other things. While the CAPM employs certain assumptions, some more realistic than others, and suffers from some deficiencies, it is the first model to address the price of risk. The CAPM assumes that investors are risk averse, which implies that the value of a risky cash flow should be less than that of a sure cash flow. That is, given two cash flows one riskier than the other, the latter should be valued at less than the former. However, the questions of how risk is measured, and given the answer to this question, what the price of that risk should be and how to quantify this price, were open questions for quite a while…

Suggested Citation

  • Eliezer Prisman, 2020. "The Capital Asset Pricing Model: CAPM," World Scientific Book Chapters, in: Lecture Notes in Investment Investment Fundamentals, chapter 7, pages 147-191, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811219566_0007
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    More about this item

    Keywords

    Equality Markets; Bond Markets; Investment Fundamentals;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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