Encyclopedia of Investment Terminology

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Capital Asset Pricing Model

The capital asset pricing model, or CAPM, works to project a return rate on an investment. It measures the potential returns in conjunction with the risks involved. To measure the projected return of an asset the risk-free interest rate is added to a unique product. This is the total of the expected market excess return minus the risk-free interest rate multiplied by the sensitivity of the asset returns to projected market returns.

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