What is the capital asset pricing model?

Sometimes referred to as CAPM, the capital asset pricing model is a process of formula that is used to describe the value relationship between the risk premium and expected return involved with a capital asset. The calculation of the capital asset pricing model helps to establish the relationship between the cost of manufacturing a product for sale, and the unit cost that must be realized in order to realize a return on the process. Understanding the capital asset pricing model is also essential to evaluating the viability of investing in stocks issued by a given company.

By valuing stocks in this manner, it is possible for an investor to determine what degree of risk is associated with the investment, as well as get an idea of what type of return can reasonably anticipated from the venture within a given period of time. This is often referred to as the systemic or market risk of the investment, and is one of the key components necessary to project the outcome of adding the stock to ... more.

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