The Capital Asset Pricing Model

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

• beta
• Sharpe ratio
• three-factor model
• momentum
• intertemporal CAPM
• Roll’s critique