Principles of Finance · free preview
The Capital Asset Pricing Model
The CAPM prices an asset's required return as the risk-free rate plus beta times the market risk premium, beta measuring the asset's contribution to market portfolio risk, and the model supplies the discount rates the valuation modules consume.
1. The model's equation and logic
The model's equation and logic
2. Beta as priced sensitivity
Beta as priced sensitivity
3. The security market line
The security market line
4. Feeding the valuation modules
Feeding the valuation modules
5. The CAPM equation
According to the CAPM, what determines a stock's required return?
6. Computing the required return
A stock has beta 1.2, the risk-free rate is 3 percent, and the market premium is 6 percent. What return do investors require?
7. Beta's definition
In the capital asset pricing model, which kind of risk does beta measure?
8. Reading the security market line
A stock offers an expected return above what its beta requires on the security market line. What does the CAPM conclude?
9. Why only systematic risk is priced
Why does the CAPM price systematic risk but not unsystematic risk?
10. The model's role in valuation
What is the CAPM's main consuming role in this course's valuation modules?
11. The market premium's two words
What two-word term names the excess of the expected market return over the risk-free rate that the CAPM scales by beta? Answer in lowercase.
12. The pricing line's name
What three-word term names the upward line from the risk-free rate through the market portfolio that graphs the CAPM's fair pricing? Answer in lowercase.
13. The market portfolio's beta
By construction, the market portfolio's own beta equals what number? Write the number.
14. The unobservable portfolio's proxy
What broad diversified index stands in for the theoretical market portfolio when betas are estimated? Answer with two words.
Practice this interactively
Free account · instant grading · spaced review that schedules itself.
Start this course for free