CAPITAL ASSET PRICING MODEL

MANUAL OF FINANCIAL CONCEPTS

CAPITAL ASSET PRICING MODEL (CAPM)

It is a method for the calculation of the yield to be requested to the own sources of financing.

CAPM = FY + ß (MY – FY)

Whereas:

FY: Yield of non risk assets (normally treasury bonds).
MY: Yield of the stock market.
(MY-FY): Risk premium of the stock market.
ß(or beta): Coefficient of variation of the company’s own sources of financing in relation to the stock market own sources of financing.With a higher value of ß, the risk of the company will be higher.
If ß>1: The expected yield of own sources of financing of the company will be higher than the one of the market.
If ß<1: The expected yield of own sources of financing of the company will be lower than the one of the market.
If ß=0: The expected yield of own sources of financing of the company will be equal to the one of the market.

Example of CAPM calculation:

 

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