![]() Under the capital asset pricing model only the (undiversifiable) market risk of securities is rewarded with additional returns, because the model assumes that rational market participants have all fully diversified away all specific risk within their investment portfolios. The capital asset pricing model - or CAPM - is a financial model that calculates the expected rate of return for an asset or investment. ![]() This equity investment requires an expected rate of return of 10%, higher than average rate of return on the market as a whole of only 9%, because its market risk (measured by beta = 1.2) is greater than the average market risk (of only 1.0). The capital asset pricing model concentrates on measuring systemic risk and its impact on the value of an asset. ![]() Rm = average expected rate of return on the market = 9%. French T he capital asset pricing model (CAPM) of William Sharpe (1964) and John Lintner (1965) marks the birth of asset pricing theory (resulting in a. Rf = theoretical risk free rate of return = 4%. The Capital Asset Pricing Model: Theory and Evidence Eugene F. Rm = average expected rate of return on the market. Rf = theoretical risk-free rate of return. The CAPM model bases its predictions on the following assumptions: Investors are given the same amount of time to assess the information.
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