Top

Published in:

2023 | OriginalPaper | Chapter

3. Capital Asset Pricing Model (CAPM)

Authors : James W. Kolari, Seppo Pynnönen

Published in: Investment Valuation and Asset Pricing

Publisher: Springer International Publishing

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

Abstract

This chapter covers the now famous Capital Asset Pricing Model (CAPM) as proposed by William Sharpe (Journal of Finance 19:425–442, 1964), for which he was awarded the Nobel Prize in Economics in 1990. The CAPM started a revolution in asset pricing that continues today.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

previous chapter Capital Market Conditions

next chapter The Market Model

Available only for authorised users

In different contexts, the variable m is sometimes referred to as the asset pricing kernel or marginal rate of substitution.

See advanced textbooks by Cochrane (2005) and Ferson (2019) for excellent in-depth discussions and applications of m-talk in asset pricing models.

For example, assuming no risk, if you indifferent between $\$100$ today or $\$101$ at the end of a year, your rate of time preference is 1%. This rate can be attributed to your utility preference of present consumption over future consumption.

See Sharpe (1964, p. 427 footnote 7).

See Sharpe (1964, p. 438, footnote 22).

See Copeland and Weston (1980, p. 170).

See Black (1981).

See the following Social Science Network (SSRN) websites:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2600356 and

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2600356.

Linter also did not assume that all investors agree on the distribution of asset returns in the next period; instead, he argued that asset prices are based on the weighted average of investor expectations about asset returns.

Note that, to find Markowitz efficient portfolios, it is not necessary to use optimization methods such as quadratic programs. Conceptually at least, beta could be used to construct efficient portfolios with different levels of market risk.

Black, F. 1981. An open letter to Jack Treynor. Financial Analysts Journal 37: 14.

Cochrane, J. H. 2005. Asset Pricing: Revised Edition. NJ: Princeton University Press, Princeton.

Fama, E.F. 1968. Risk, return, and equilibrium: Some clarifying comments. Journal of Finance 23: 29–40.CrossRef

Ferson, W. E. 2019. Empirical Asset Pricing: Models and Methods. MA: The MIT Press, Cambridge.

French, C.W. 2003. The Treynor Capital Asset Pricing Model. Journal of Investment Management 1: 60–72.

Lintner, J. 1965. The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics 47: 13–37.CrossRef

Markowitz, H. 1952. Portfolio selection. Journal of Finance 7: 77–91.

Markowitz, H.M. 1959. Portfolio Selection: Efficient Diversification of Investments. New York, NY: John Wiley & Sons.

Mossin, J. 1966. Equilibrium in a capital asset market. Econometrica 34: 768–783.CrossRef

Sharpe, W.F. 1964. Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance 19: 425–442.

Tobin, J. 1958. Liquidity preference as behavior toward risk. Review of Economic Studies 4: 65–86.CrossRef

Treynor, J.L. 1961. Market value, time, and risk. Unpublished manuscript.

Treynor, J.L. 1962. Toward a theory of market value of risky assets. Unpublished manuscript.

Weston, T.E., and J.F. Weston. 1980. Financial Theory and Corporate Policy. Reading, MA: Addison-Wesley Publishing Company.

Title: Capital Asset Pricing Model (CAPM)
Authors: James W. Kolari
Seppo Pynnönen
Publisher: Springer International Publishing
Book: Investment Valuation and Asset Pricing
Print ISBN: 978-3-031-16783-6

Electronic ISBN: 978-3-031-16784-3

Copyright Year: 2023
DOI: https://doi.org/10.1007/978-3-031-16784-3_3