From the course: Finance and Accounting Tips

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Capital asset pricing model (CAPM)

Capital asset pricing model (CAPM)

From the course: Finance and Accounting Tips

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Capital asset pricing model (CAPM)

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- It's time to talk about what is probably the most famous finance model, the Capital Asset Pricing Model or the CAPM. - Now, the CAPM is the expected return provided by an investment given its risk. The official formula for the CAPM is as follows. Expected return equals the risk-free rate of return plus an equity risk premium multiplied by beta. - [Man With Glasses] So let's break this equation down into its components. Let's start with the risk-free rate. - Now, the risk-free rate on an investment is the rate of return on an investment that has zero risk. The closest thing you can get to a zero-risk investment is the three-month US Treasury Bill Rate as there is little chance that the US government is going to default on that obligation. - Let's hope there's little chance. So over the last 50, 60, 70 years worldwide, the risk-free rate has been about 5%, that's just an approximation. So when you think about risk-free rate, I want you to have that number in your brain. 5% is a good…

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