The Capital Asset Pricing Model

Encyclopedia 2021, 1(3), 915-933; DOI: 10.3390/encyclopedia1030070

19 Pages Posted: 13 May 2021 Last revised: 9 Sep 2021

See all articles by James Ming Chen

James Ming Chen

Michigan State University - College of Law

Date Written: May 11, 2021

Abstract

The capital asset pricing model (CAPM) is an influential paradigm in financial risk management. It formalizes mean-variance optimization of a risky portfolio given the presence of a risk-free investment such as short-term government bonds. The CAPM defines the price of financial assets according to the premium demanded by investors for bearing excess risk.

Keywords: CAPM; risk premium; risk-free rate; beta; Sharpe ratio; information uncertainty; Taylor series expansion; skewness; kurtosis; asset allocation; financial planning; three-factor model; value; size; momentum; intertemporal CAPM; consumption-based CAPM; heterogeneous agents; multifractality

JEL Classification: G11, G12

Suggested Citation

Chen, James Ming, The Capital Asset Pricing Model (May 11, 2021). Encyclopedia 2021, 1(3), 915-933; DOI: 10.3390/encyclopedia1030070, Available at SSRN: https://ssrn.com/abstract=3844183 or http://dx.doi.org/10.2139/ssrn.3844183

James Ming Chen (Contact Author)

Michigan State University - College of Law ( email )

318 Law College Building
East Lansing, MI 48824-1300
United States

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