Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and expected return, used in the pricing of risky securities. The reason for CAPM is due to the investors need for compensation in 'time value of money' and 'risk'.
Formula: Ra = Rf + βa(Rm - Rf)
where: Ra is 'return of asset'; Rf is risk free rate; βa is beta of the asset; Rm is expected market return.
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