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
Date Written: May 11, 2021
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: Suggested Citation