CAPM

Question 1

What is CAPM?

Answer 1

Capital Asset Pricing Model

Question 2

What does CAPM do?

Answer 2

Shows that both efficient and inefficient assets can be priced (measuring expected return for risk), using the E[Ri]=Rf+Betai(E[Rm]-Rf)
Where:
Rf is the risk-free rate
E[Rm] is the expected return on the market portfolio
E[Rm]-Rf is the market risk premium
Betai is the beta of the asset, Betai=COV(Ri,Rm)/VAR(Rm)

Question 3

What does beta measure?

Answer 3

It measures the asset’s exposure to the market