capital asset pricing model?
2007-07-22 11:03:51 · 3 answers · asked by venkataramanan t 2 in Business & Finance ➔ Investing
The CAPM is, as you noted, the capital asset planning model.
It tells a company its cost of capital. It company only makes an economic profit (as opposed to a book profit), when its economic income is greater than its cost of capital.
Cost of capital is calculated as the riskless rate of return (a three month treasury bond, for example) + the after tax cost of debt + the equity premium. All three terms are multiplied by beta, a risk factor.
There are usually various guidelines for the equity premium, but it is usually six to eight %.
Jack
2007-07-22 11:39:39 · answer #1 · answered by Anonymous · 0⤊ 1⤋
Its a formula that is designed to compute the required rate of return for an asset.
The required rate of return is the base line rate you judge investments on.
An investement that returns 12% per year sounds good, but if CAPM says you need 14%, then you actually cause damage by investing in the 12%.
2007-07-26 02:11:17 · answer #2 · answered by Kostas C 2 · 0⤊ 0⤋
The capital asset pricing model is a method for valuing assets. See www.investopedia.com.
2007-07-26 20:43:31 · answer #3 · answered by Michael K 6 · 0⤊ 0⤋