The Theory of Capital Asset Pricing Model

2580 Words Feb 3rd, 2018 10 Pages
The key points of the theory are extracted and highlighted with respect to the explanation of William Sharpe's "A theory of Market Equilibrium under conditions of risk".
Capital asset pricing model is a model, which was introduced in order to understand the relationship between the risk and the investment that is made. What businesspersons or investors tends to do is make return of their investment fairly equally with return of the risk that has been taken on their part. They want to be compensated for the risk they have taken with their investment. At this point, the time value of money is of great importance since it describes what the investment's value will be after the prescribed years from now (Korajczyk, 1999). This model explains how much of the return will be received by taking the risk and what are the chances that the return on investment compensates. Though its tests are difficult to be employed, results may differ or sometimes may come out as wrong assumptions and calculations. Every investment induces risk when it takes place and if the resulting conclusions propose that the return on investment and risk will not be made as desired then the investment…