Capital Asset Pricing Model: Meaning and Assumptions Management YouTube Lecture Handouts
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Capital Asset Pricing Model Pricing and Assumptions - Meaning, Assumption, Formula|Management
Title: Capital Asset Pricing Model: Meaning and Assumptions
Meaning
- CAPM is used to show the relationship between the expected return and risk in a security.
- It was introduced by Jack Treynor, William Sharpe and John Litner.
- Elements like Beta or systematic risk are used to measure the risk in a security.
Assumptions
- All investors are averse to the risk.
- The amount of available assets is fixed during a given time.
- Markets are ideal i.e.. , there is not transaction cost, taxes, inflation or short selling restriction.
- Investors hold diversified portfolios. Hence, there is no unsystematic risk.
- Markets are highly efficient. All investors have equal access to all the information.
- Beta coefficient is the only measure of the risk.
- All assets are absolutely liquid and infinitely divided.
- Markets are in equilibrium; All investors are price takers not makers.
Concept of Security Market Line
It shows the graphical representation of the CAPM
Formula
- Ra = Rf + Ba + (Rm-Rf)
- Ra = Expected return on a security
- Rf = Risk free rate
- Rm = Expected return of the market
- Ba = Beta of a security
MCQs
The other name of Beta is?
A. Unsystematic risk
B. Market risk
C. Systematic risk
D. None of the above
Answer: C
What does Rf represent in CAPM formula?
A. Risk rate
B. Risk free rate
C. CAPM
D. SML
Answer: B
✍ Manishika