Concept Of Capital Asset Pricing Model

1340 Words Jul 2nd, 2015 6 Pages
1. Introduction
Capital asset pricing model know as CAPM is a model for calculates the required rate of return for any risky asset. This method is often used to determine the fair price of an investment should be. This essay will discuss about usage of CAPM in securities industry, through probe the advantages and limitation of CAPM to this industry.

2. Concept of Capital asset pricing model
During 1952, Markowitz came out with a theory based on diversified investment is able to construct the risk-averse investors. He diversified investment portfolio theory and efficiency of the priory rigorous mathematical tools as a means to demonstrate risk-averse investors in a number of risky assets in construct the optimal portfolio methods (Markowitz, 1952).

But due to the existence of some problem, from the early 1960s began, some economists began to representatives from the empirical perspective, and explore investment securities reality that Markowitz’s theory in reality can be simplified? By building on the theory of Harry Markowitz on diversification and modern portfolio theory, William F.Sharpe (Sharpe, 1964), John Lintner (Lintner, 1965) and Jan Mossin (Mossin, 1966) had come out with the new theory which is knows as Capital asset pricing model.

As expected based on the risk assets of the prediction model based on equilibrium income, CAPM describes the formation of market equilibrium at investors using Markowitz’s theory of investment management conditions, the expected…

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