Construct · 1 fields · 4 citations

capital asset pricing model: a standalone construct

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capital assetpricing model1 CONSTRUCTCAPMSHARPE · CAPM

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Financial economics

The equilibrium model pricing expected return by systematic risk

William Sharpe's 1964 paper Capital asset prices, for which he shared the 1990 Nobel Memorial Prize in Economic Sciences, gave the first published statement of the capital asset pricing model, with John Lintner (1965) and Jan Mossin (1966) deriving equivalent versions independently soon after, and Jack Treynor having reached a similar result in an unpublished 1962 manuscript. Building on Harry Markowitz's portfolio theory, the model states that in market equilibrium the expected return on any asset equals the risk-free rate plus the asset's beta multiplied by the market risk premium, where beta measures how strongly the asset's return moves with the overall market and the market risk premium is the extra return investors expect for holding the market instead of a safe asset. The single relationship it describes is that only market-wide, non-diversifiable risk (systematic risk) earns higher expected return, because investors can remove asset-specific risk by holding a diversified portfolio. As a landmark of financial economics, the model supplies the standard formula for the cost of equity capital and the theoretical baseline against which the abnormal return called alpha is measured.[1][2][3][4]

Unit
A named equilibrium asset-pricing model relating an asset's expected return to its systematic risk
Recovery means
Not applicable
Measured by
Operationalised by estimating an asset's beta from a regression of its excess returns on market excess returns, then applying the security market line E(R) = Rf + beta(E(Rm) - Rf)

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Nearby constructs

systematic risk3 fields · 5 citationsjingle · one letter apart, two constructsportfolio selection4 fields · 5 citationsjingle · one idea, four constructsSharpe ratio1 fields · 2 citationsanchor · a standalone construct

References

  1. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, 19(3), 425–442. https://doi.org/10.1111/j.1540-6261.1964.tb02865.x
  2. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. The Review of Economics and Statistics, 47(1), 13–37. https://doi.org/10.2307/1924119
  3. Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica, 34(4), 768–783. https://doi.org/10.2307/1910098
  4. Treynor, J. L. (1999). Toward a theory of market value of risky assets. In R. A. Korajczyk (Ed.), Asset pricing and portfolio performance: Models, strategy and performance metrics (pp. 15–22). Risk Books. (Original work written 1962)

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