Question

What is the capital asset pricing model and what does the model depend on?

What is the capital asset pricing model and what does the model depend on?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Capital asset pricing model is a model that compares risk and return. CAPM is used to calculate an appropriate discount or capitalization rate, which is then used in the capitalized cash flow or discounted cash flow valuation methods.

Below is the formula and compnents on which the model is dependent.

Formula

E(Ri) = r + ?i [E(Rm) ? r]

  • E[Ri] = the expected return on asset i,
  • Rf = the risk-free rate,
  • E[Rm] = the expected return on the market portfolio,
  • bi = the Beta on asset i, and
  • E[Rm] - Rf = the market risk premium.

The model provides Expected return for an asset which depends on risk free rate, expected return of market, Beta (risk) of the asset and market risk premium.  

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
What asset pricing model does the WACC use to compute equity capital costs? In this model,...
What asset pricing model does the WACC use to compute equity capital costs? In this model, what does the market risk premium and the Beta, respectively, seek to address? Using this model that you described, what would be the cost of equity if the Beta is 0? Is a Beta of -1 even possible, and if it is, what would it suggest?
How does the Capital Asset Pricing Model (CAPM) improve on Markowitz and Treynor-Black methods?
How does the Capital Asset Pricing Model (CAPM) improve on Markowitz and Treynor-Black methods?
explain the concept of the capital asset pricing model
explain the concept of the capital asset pricing model
Compare and contrast Capital Asset Pricing Model (CAPM) with Arbitrage Pricing Theory (APT). What is the...
Compare and contrast Capital Asset Pricing Model (CAPM) with Arbitrage Pricing Theory (APT). What is the single most important issue with CAPM? Which model is more realistic? Why?
1. Does the capital asset pricing model work for companies? 2. How can a company use...
1. Does the capital asset pricing model work for companies? 2. How can a company use it to their advantage? 3. In what ways will it work against a company?
According to the capital asset pricing model (CAPM), where does an asset’s expected return come from?...
According to the capital asset pricing model (CAPM), where does an asset’s expected return come from? Please explain each component.
Discuss how costs of capital relate to Capital Asset Pricing Model (CAPM).
Discuss how costs of capital relate to Capital Asset Pricing Model (CAPM).
What is the Capital Asset Pricing Model (CAPM)? Explain each variable in CAPM. What is the...
What is the Capital Asset Pricing Model (CAPM)? Explain each variable in CAPM. What is the Security Market Line (SML)? Please feel free to expand on your answers.
Explain what the capital asset pricing model (CAPM) is mainly used for, and its theoretical foundation.
Explain what the capital asset pricing model (CAPM) is mainly used for, and its theoretical foundation.
Explain graphically and verbally the connection from the Markowitz model to the Capital Asset Pricing Model...
Explain graphically and verbally the connection from the Markowitz model to the Capital Asset Pricing Model (CAPM).
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT