Overview
Asset pricing models are essential tools in finance that help investors determine the expected returns on investments based on their associated risks. The most well-known models include the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT), each offering unique perspectives on ho...
Key Terms
Example: Investors use asset pricing to decide whether to buy or sell stocks.
Example: Investing in stocks carries higher risk than bonds.
Example: A stock that increases from $10 to $15 has a return of 50%.
Example: CAPM is used to estimate the expected return on equity.
Example: A stock with a beta of 1.2 is 20% more volatile than the market.
Example: If the expected return on the market is 10% and the risk-free rate is 3%, the market risk premium is 7%.