Capital asset pricing model
The capital asset pricing model (CAPM) is a way to theoretically calculate the appropriate rate of return of an asset (or stock).
The CAPM Formula is:
<math>E(Ra)=Expected\ Return\ of\ Asset</math>
<math>Rf=Risk\ Free\ Rate</math>
<math>B=Beta\ of\ Security</math>
<math>E(Rm)=Expected\ Return\ of\ Market</math>
Some of the shortcomings with this model is that it is backward looking. Beta is a historical measure and therefore it might be more useful to calculate a firm's expected Beta. In addition, Beta is not really a useful measure of risk, instead it is a measure of volatility, which finance theorists like to use interchangeably with risk.
Related Fool Articles
Related Community Blogs
Recent Mentions on Fool.com
- Colony Financial Inc.: Is It Time to Buy This Dividend Stock?
- Hyatt Delivers Comfortable Performance
- 3 Companies Aggressively Investing for Growth
- What CYS Investments Inc.'s Earnings Say About Annaly Capital Management
- Does Time Warner Inc's $6.5 Billion Buyback Make Sense?
- Top Franchises: Investing in Ruth's Hospitality