Equations · Finance and economics
Capital asset pricing model (CAPM)
The return investors should expect from an asset, given how it moves with the market.
E(Rᵢ) = R_f + βᵢ(E(R_m) − R_f)
Aethel says
E of R sub i equals R sub f plus beta sub i times the quantity E of R sub m, minus R sub f
What it says
An asset earns the risk-free rate plus a premium for market risk. Beta measures that risk: a beta of 1 moves with the market, above 1 amplifies it, below 1 dampens it.
Symbol by symbol
| Symbol | Say it | Means |
|---|---|---|
| E(Rᵢ) | E of R sub i | the expected return on asset i |
| R_f | R sub f | the risk-free rate |
| βᵢ | beta sub i | the asset's sensitivity to the market |
| E(R_m) | E of R sub m | the expected market return |
More onβBeta
Where you meet it
Corporate finance, investments and the CFA curriculum.
Questions
How do you say Capital asset pricing model out loud?
E(Rᵢ) = R_f + βᵢ(E(R_m) − R_f) is read: “E of R sub i equals R sub f plus beta sub i times the quantity E of R sub m, minus R sub f.” That is exactly what Aethel says when it meets the formula in a book.
What does E(Rᵢ) mean in Capital asset pricing model?
E(Rᵢ) (said “E of R sub i”) is the expected return on asset i.
What does R_f mean in Capital asset pricing model?
R_f (said “R sub f”) is the risk-free rate.
Can I listen to the equations in my own textbook like this?
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