The Capital Asset Pricing Model (CAPM)

The Capital Asset Pricing Model (CAPM)

The CAPM first began in 1952 by Harry Markowitz and his paper rigorously described the aspect of portfolio risks. A portfolio risk is when a stockholder or an investor invests in so many assets so that the rate of a risky turnover is spread amongst the assets to reduce the percentage of loss returned on the assets. For example, Mr. A buys 10 different assets from different companies so that if asset A from Alek corporations fail, Mr. A can still get returns from the 9 other assets, hence his risk and loss has been shared amongst his invested assets.

After a few years, four great economists developed the model. These economists are; John Lintner in 1965, Jack Treynor in 1962, Jan Mossin in 1966 and William

To Markowitz, the CAPM model operates in an environment where all investors have vague assets, all investors are peril antagonistic minded, no taxes, inflation or transactions cost are added to securities purchased. Nobody likes a risky investment with a 50 percent possibility so investors look for securities with low risk and high returns. Risk free assets can be assets purchased from the government such as treasury bills and corporate bonds. In finance, the market risk is usually represented with the quantity beta (β). The beta measures the value of risk in a portfolio using the market value as a benchmark, also called the beta

For instance, CAPM assumes all investors have access to the same level of information which allows them to invest in assets wisely. Also, the model assumes the variation of an asset is a tolerable tool used to ration the risk of the asset. With this assumption, CAPM assumes all investment in assets have the same percentage of risk which is relatively not real. Furthermore, the Fama-French three factor model is a model by the famous award winning Eugene Fama and also by Kenneth French to relatively explain and describe returns on stocks. The assumptions shows that observed assessments in market glitches like the scope and worth result of the assets cannot be explained by the CAPM. The CAPM is used to evaluate cost of common