Capital Asset Pricing Model (CAPM)


Capital asset pricing model (CAPM) is a theory that states that the expected return on any asset or security is given by a formula. It is generally conceded in finance that the CAPM is effectively untestable. [1]

CAPM approach to investment analysis is a technique that employs the CAPM equation to calculate the risk adjusted, after-tax required rate of return in the net present value equation. This approach replaces the use of the traditional weighted average cost of capital. Beta is usually estimated as the average of the betas for firms already operating (exclusively) in the market in which the investment will be made. [1]


  1. ^ American Marketing Association, AMA Dictionary.

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