Current State of Cambodia

Sample Essay on Capital Asset Pricing Model

Capital Asset Pricing Model (CAPM)

Capital asset pricing model (CAPM) refers to a model that is used in finance in determining the theoretically appropriate rate of return of a given asset that is required by an asset so that it can be added to a well-diversified portfolio that already exists considering the non-diversified risk of the asset. This model describes how expected returns and risk relates and it is commonly used in pricing risky securities.

The model takes sensitivity of the asset to non-diversifiable risk into account. Non-diversifiable risk is also called the market risk or systematic risk and in financial industry it is usually represented by a quantity beta (β). The model also considers the expected returns for the market as well as the expected returns for a theoretical asset that is free of risk.

According to capital asset pricing model, beta determines the cost of equity of an investor. Jack Treynor introduced the capital asset pricing model between 1961 and 1962.  William Sharpe, John Lintner and Jan Mossin contributed on the model independently in the later years. All these scholars were building their concepts on the earlier work by Harry Markowitz on modern portfolio and diversification theory. Merton Miller, Markowitz and Sharpe were jointly given the Nobel Memorial Prize in Economics in 1990 for their contribution in the financial economics field.

Another version of capital asset pricing model was developed by Fischer Black in 1972 known as the Black CAPM or the Zero-beta CAPM. This model does not assume that riskless asset exists. The model was robust against the empirical testing. It was highly influential in the overall adoption of CAPM. Despite having empirical flaws and more contemporary approaches, capital asset pricing model is still popular because it is simple and it can be used in different situations.

Going by the capital asset pricing model, an investor deserves compensation in two different ways. These are time value of their money and risk.

Time value of the money that an investor spends on a project is represented by a risk-free (rf) rate. It offers compensation to an investor for having put their money in an investment project for specified duration. The risk compensation caters for additional risk that an investor takes by investing money in a project. It is calculated using risk measure or beta that provides a comparison for the asset’s returns against the market over duration that the investor invests and market premium. The capital asset pricing model states that, expected returns of a portfolio or security equals rate on risk-free security and risk premium.

Order an essay on capital asset pricing model (CAPM) now

Are you struggling to beat the strict essay submission deadline set by your teacher or lecturer for writing an essay on capital asset pricing model (CAPM)? Do you need online help with essay writing assignment? Then place an order for your essay assignment with us at and we will help you. We are a team of professional essay writers and our goal is to offer you the best essay help online.

Place an order for your capital asset pricing model (CAPM) essay at and we assure you that we will deliver a supreme quality and fully customized essay within your timeline.

Posted by:


Related articles

list of articles



  • Sample Essay on SWOT Analysis of The Home Depot January 20, 2016
    SWOT Analysis of The Home Depot SWOT analysis of The Home Depot is among the best tools used by the home improvement retailer to gauge its ability to stay afloat and profitable in the market. Although it is considered the largest home improvement retail chain in the world with an estimated revenue base on more […]


Latest News From Blog

Check out Our Blog's assignment samples and tips on how to Write Assigments
Essay sample on the Effects of Cold War on Soviet Union..

Effects of Cold War on Soviet Union The Soviet Union was one of the main participants in the Cold War. It was engaged in the war with the USA and - See more

Essay sample on Effects of Cold War on Asia

Effects of Cold War on Asia Tensions of the Cold War began shifting from Europe to Asia in 1949 when Mao Zeodong proclaimed the birth of the ...Read More

Sample Essay on United Kingdom Healthcare System

United Kingdom Healthcare System United Kingdom healthcare system, also known as the National Health Service was established...Read More

Back to Top