What is a model of asset prices?

Model setting of asset prices or capital assets (CAPM) prices (CAPM) is a means of assessing the systematic risk of investing in shares and determining the expected return rate. Nobel prizes won by economist William Sharpe won for the first time in 1970. The relevant revenue for stocks is estimated by the beta risk of asset, which is the relative volatility of shares compared to the market. CAPM focuses on the assumption that increased risks guarantee and should bring higher returns. By using a model of capital assets, the investor can find out whether the current stock price is in accordance with the expected return level.

Asset with beta zeros are relatively without risk. The formula used by a model of asset prices opens up with a risk -free return rate, for example at a ten -year Ministry of Finance. In writing, the formula is as follows: the expected return = risk-free rate + beta (market rate-bezrisic rate). The deduction of a risk -free ROM fettle rateU, which the investor should obtain when investing in the stock market above the market without risk without assets. In order to create a reasonable and expected return rate, the bonus is subsequently multiplied by the beta of individual stocks and added to the risk -free rate.

For example, if a ten -year bond of the Ministry of Finance brings two percent, then a risk -free rate is two percent. If the market rate is 10 percent, then the premium generated by investment in shares is derived from the deduction of two percent from the market risk. XYZ has beta the risk of two. The premium, which should produce investment in XYZ at a risk -free rate, is calculated by multiplying twice by eight. XYZ shares should generate a 16 % bonus for a risk of two percent, ie 18 percent.

LINE (SML) is a line chart of the asset price model, with beta to carry on the horizontal axisand the return on the asset on the vertical axis. With the upward slope to the right, the line represents the relationship between beta and the expected return. If investors compare the actual returns of the company on this plot, shares that provide revenues below the line under the line are poor artists, while not justifying the risk. On the other hand, if the actual return charts above the line, the supply is underestimated. This shares is advantageous.