capital asset pricing model

= CAPM
A model that can be used to calculate the expected or average return on an investment. It assumes that this return will be composed of the risk-free rate of return and a risk premium. Formally, the CAPM is based on the equation:
E(Ri) = Rf + βi[E(Rm) – Rf],
where E(Ri) is the expected/average return on the asset or portfolio i, Rf is the risk-free rate of return, E(Rm) is the expected/average return on all assets, and βi is the beta coefficient of the asset or portfolio i. The beta is the percentage that the return on i will change with a 1% change in Rm. The CAPM is a measure of the risk in the asset or the portfolio. It is the basis for calculating the required return on an investment and is frequently used to calculate the discount rate for a net present value calculation.

Accounting dictionary. 2014.

Look at other dictionaries:

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