Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
What is Capital Asset Pricing Model (CAPM)?
Prices an asset's expected return purely as compensation for systematic risk. Elegant and widely taught; empirically incomplete, which is what motivated the factor models that followed.
Capital Asset Pricing Model (CAPM): a worked example
3% risk-free, beta 1.2, 6% market premium gives 3% + 1.2(6%) = 10.2% expected return.
More terms in Portfolio Management
Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
Rebalancing
Periodically restoring the portfolio to its target weights.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Efficient Frontier
The set of portfolios with the best return for each level of risk.
Efficient Market Hypothesis
Prices already reflect available information.
Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.
Total Return
Price change plus income, as a single return figure.