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CAPM

CAPM

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Published by shaza443

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Categories:Types, Business/Law
Published by: shaza443 on Feb 29, 2012
Copyright:Attribution Non-commercial

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10/06/2013

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Capital Asset Pricing ModelCapital Asset Pricing Model
CAPM provides that investors are rewarded for bearing systematicrisk which is attributed to stock¶s response to a change in themarket. Systematic risk can not be eliminated and the investor hasto bear this risk. Though investors are generally risk averse butthey have to assume systematic risk and more they assume it thehigher will be the reward. Whereas, security¶s individual risk or unsystematic risk can be eliminated by diversification. So theinvestors are actually rewarded for assuming systematic risk.
 
Capital Asset Pricing ModelCapital Asset Pricing Model
The CAPM can be explained like this that expected return ona security is equal to its level of systematic risk. The capitalasset pricing model further provides that the beta of a stock remains stable over a period of time.
 
Capital Asset Pricing ModelCapital Asset Pricing Model
Systematicriskismarket-relatedriskthatcannotbediversifiedaway.Becausesystematicriskcannotbediversifiedaway,investorsarerewardedforassumingthisrisk.Eachoftheindividualsecuritieshasitsownrisk(andreturn)characteristics,describedasspecificrisk.Byincludingasufficientlylargenumberofholdings,thespecificriskoftheindividualholdingsoffseteachother,diversifyingawaymuchoftheoverallspecificriskandleavingmostlynondiversifiableormarket-relatedrisk.

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