Capital Asset Pricing Model (CAPM)
- A model for describing the way prices of individual
assets are determined in an efficient market, based
on their relative riskiness in comparison with the
return on risk-free assets. According to this model,
prices are determined in such a way that risk premiums
are proportional to systematic risk as measured by
the beta coefficient. As such, the CAPM provides an
explicit expression of the expected returns for all
assets. Basically, the CAPM holds that if investors
are risk averse, high-risk stocks must have higher
expected returns than low-risk stocks.
