CAPITAL ASSET PRICING MODEL

The model for the pricing of all risky assets formed by developing the portfolio theory putting forward by Markowitz. CAPM which is the product of this theory, is based on the single variable, accepts the market portolio as independent variable and explains to the return on all risky securities by the market portfolio return. The Capital Asset Pricing Model (CAPM) is an equilibrium model to research the relationship between systematic risk and expected return in a competitive capital market as a result of their research introduced independently by Sharpe (1964), Lintner(1965) and Mossin (1966) after Markowitz explains the principles of modern portfolio theory in 1952 CAPM is referred to Sharpe-Lintner-Mossin model as financial literature. According to CAPM, the return of a security depends on the sum of systematic risk and unsystematic risk. The unsystematic risk is competely eliminated and the systematic risk remains alone in the effectively diversified portfolio.

The basic features of CAPM are as follows:

  • The risk of securities is measured with beta (β)
  • The expected return of security depends on risk free rate, the risk premium of market and beta of security Investors treat of risky assets in sufficient diversified portfolios
  • Investors can take more risk to increase the expected return of investment

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