imported>Doug Williamson |
imported>Doug Williamson |
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| (CAPM).
| | The Certificate in International Cash Management awarded by the Association of Corporate Treasurers. |
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| The capital asset pricing model links the expected rates of return on traded assets with their relative levels of market risk (beta).
| | CertICM is the definitive qualification in cash management for both corporate and financial institutions from a global perspective. |
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| The model’s uses include estimating a firm’s market cost of equity from its beta and the prevailing theoretical market risk-free rate of return. | | [http://www.treasurers.org/qualifications/certicm The CertICM qualification.] |
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| The CAPM assumes a straight-line relationship between the beta of a traded asset and the expected rate of return on the asset.
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| | == See also == |
| | * [[Association of Corporate Treasurers]] |
| | * [[Cash management]] |
| | * [[CertFMM]] |
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| Expressed as a formula:
| | [[Category:Treasury_operations_infrastructure]] |
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| Re = Rf + beta x [Rm-Rf]
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| Where:
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| Re = return on security.
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| Rf = theoretical [[risk free rate of return]].
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| Beta = relative market risk.
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| Rm = average expected rate of return on the market.
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| For example where:
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| Rf = theoretical risk free rate of return = 4%;
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| Beta = relative market risk = 1.2; and
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| Rm = average expected rate of return on the market = 9%.
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| Ke = 4% + 1.2 x [9% - 4% = 5%]
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| = <u>10%.</u>
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| This investment requires an expected <u>rate of return</u> of 10%, higher than average rate of return on the market as a whole of only 9%, because its market <u>risk</u> (measured by Beta = 1.2) is greater than the average market risk of only 1.0.
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| Under the capital asset pricing model only the (undiversifiable) market risk of securities is rewarded with additional returns, because the model assumes that rational market participants have all fully diversified away all specific risk within their investment portfolios.
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| == See also ==
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| * [[Beta]]
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| * [[Business risk]]
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| * [[Capital gain]]
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| * [[Cost of equity]]
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| * [[Equity beta]]
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| * [[Equity risk]]
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| * [[Equity risk premium]]
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| * [[Financial risk]]
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| * [[Market risk]]
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| * [[Market risk premium]]
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| * [[Modern Portfolio Theory]]
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| * [[Risk]]
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| * [[Security Market Line]]
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| * [[Specific risk]]
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| * [[Systematic risk]]
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