Question

Portfolio Theory The Capital Asset Pricing Model, almost always referred to as the CAPM, is a centre-piece of modern financial economics. It was first proposed by William F. Sharpe, who was awarded the 1990 Nobel Prize for economics. Required: (a) What is CAPM and what purposes does it serve in finance in general, and in investments in particular? Discuss.

Answer 1

The Capital Asset Pricing Model (CAPM) is a central concept in finance that helps determine the expected return on an investment based on its level of risk. It is used to calculate the required rate of return for an investment and serves as a benchmark for evaluating investment opportunities. The CAPM is used to allocate investment capital efficiently and build diversified portfolios.

Step-by-step explanation:

The Capital Asset Pricing Model (CAPM) is a central concept in finance that helps determine the expected return on an investment based on its level of risk. It is used to calculate the required rate of return for an investment and serves as a benchmark for evaluating investment opportunities. The CAPM considers the relationship between the risk of an investment, measured by its beta, and the expected return.One purpose of the CAPM is to help investors make informed decisions by assessing the expected return and risk of a particular investment. It provides a framework for understanding the trade-off between risk and return and helps individuals and institutions allocate their investment capital efficiently. The CAPM is also widely used in portfolio management, as it helps investors build diversified portfolios that balance risk and return.