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).
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Expanded Definition
The CAPM Formula is:
where
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.
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