What is capital asset pricing model?

capital asset pricing modelIn investment plans there are relativistic terms that are given to investment capital in the relative value model. In relation to a company other company’s assets are valued. Similarly the Capital Asset Price Model is based on its principles. It states that and investor when accepting risks in the investment expects a higher potential of return. The greater the risk the greater is the return and smaller the risk the smaller is the return. This principle was proposed by William Sharpe in the early 1960’s. He believed that risk was unavoidable with the market situation and hence also proposed diversification of risks even though it also meant a diversified return. 

In short CAPM deals with calculating the volatility of the stock on the basis of the stocks annual performance. It assumes that the market works ideally and calculates a correct to mean over time. CAPM must also be updated with respect to investments in the stock for the near future.

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