imported>Doug Williamson |
imported>Administrator |
| Line 1: |
Line 1: |
| (CAPM). | | 1. ''Financial accounting.'' |
| | This is either a liability or capital within the balance sheet, or revenue within the profit and loss account (or income statement). |
|
| |
|
| The model links the expected rates of return on traded assets with their relative levels of market risk (beta). | | 2. ''Banking.'' |
| The model’s uses include estimating a firm’s market cost of equity from its beta and the prevailing market risk-free rate of return.
| | In banking a credit balance - in the bank's records - is one which stands in favour of the customer. The bank owes money to the customer. |
| | (Contrasted with a debit balance in the bank's records. Being a balance standing in favour of the bank.) |
|
| |
|
| The CAPM assumes a straight-line relationship between the beta of a traded asset and the expected rate of return on the asset.
| |
| Expressed as a formula:
| |
| Ke = Rf + beta x [Rm-Rf]
| |
|
| |
|
| Where:
| | == See also == |
| | | * [[Balance sheet]] |
| Ke = cost of equity.
| | * [[Capital]] |
| Rf = risk free rate of return.
| | * [[Debit balance]] |
| Beta = relative market risk.
| | * [[Liabilities]] |
| Rm = average expected rate of return on the market.
| | * [[Profit and Loss account]] |
| | | |
| For example where:
| |
| Rf = risk free rate of return = 4%;
| |
| Beta = relative market risk = 1.2; and
| |
| Rm = average expected rate of return on the market = 9%.
| |
|
| |
|
| Ke = 4% + 1.2 x [9% - 4% = 5%]
| |
| = <u>10%.</u>
| |
|
| |
| 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.
| |
|
| |
| 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.
| |
|
| |
| == See also ==
| |
| * [[Beta]]
| |
| * [[Business risk]]
| |
| * [[Capital gain]]
| |
| * [[Cost of equity]]
| |
| * [[Equity beta]]
| |
| * [[Equity risk]]
| |
| * [[Equity risk premium]]
| |
| * [[Financial risk]]
| |
| * [[Market risk]]
| |
| * [[Market risk premium]]
| |
| * [[Modern Portfolio Theory]]
| |
| * [[Risk]]
| |
| * [[Specific risk]]
| |
| * [[Systematic risk]]
| |
1. Financial accounting.
This is either a liability or capital within the balance sheet, or revenue within the profit and loss account (or income statement).
2. Banking.
In banking a credit balance - in the bank's records - is one which stands in favour of the customer. The bank owes money to the customer.
(Contrasted with a debit balance in the bank's records. Being a balance standing in favour of the bank.)
See also
