CAPM MODEL – APLICATION IN CAPITAL MARKET OF REPUBLIC OF SRPSKA

Abstract

The CAPM model was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin independently, building on the earlier work of Harry Markowitz on diversification and modern portfolio theory. The Capital Asset Pricing Model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well diversified portfolio, given that asset's non-diversifiable risk. The CAPM formula takes into account the asset's sensitivity to systematic risk or market risk, in a number often referred to as beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. The CAPM is a model for pricing an individual asset or a portfolio.

Keywords

• expected rate of return, asset, systematic and nesystematic risk, beta coefficient.