Framework

Capital asset pricing model (CAPM)

The question it answers

When valuing a share or project, what return should an investor or CFO require to cover the risk-free rate and the market risk (beta) the asset carries?

Origin
Sharpe (1964); Lintner (1965); Mossin (1966); critique in Roll (1977)
Diagram type
Hub diagram
Level of analysis
Individual
Topics
Corporate finance
Stack of clay coins beside a rising glass bar chart, icon for finance

Diagram

Capital asset pricing model (CAPM)

Required return
Risk-free rate
Beta
Market risk premium
Roll's critique: true market portfolio is unobservable

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Lintner, J. (1965) ‘The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets’, Review of Economics and Statistics, 47(1), pp. 13–37.doi:10.2307/1924119Source page
  2. Mossin, J. (1966) ‘Equilibrium in a capital asset market’, Econometrica, 34(4), pp. 768–783.doi:10.2307/1910098Source page
  3. Roll, R. (1977) ‘A critique of the asset pricing theory's tests, part I: on past and potential testability of the theory’, Journal of Financial Economics, 4(2), pp. 129–176.doi:10.1016/0304-405x(77)90009-5Source page
  4. Sharpe, W.F. (1964) ‘Capital asset prices: a theory of market equilibrium under conditions of risk’, Journal of Finance, 19(3), pp. 425–442.doi:10.2307/2977928Source page