question archive Capital asset pricing model (CAPM) is a widely accepted, though controversial, theory of asset pricing in the capital market
Subject:BusinessPrice: Bought3
Capital asset pricing model (CAPM) is a widely accepted, though controversial, theory of asset pricing in the capital market. According to CAPM, the expected return of any asset in the capital market is a linear function of the expected return on the whole market and the expected return of the risk-free rate. Mathematically, the model is stated as per Equation 1:E(Re) = E(RFR) + β *E(Rm – RFR) (1) Where E(Re) is the expected rate of return on a specific asset, E(RFR) is the expected risk-free rate, β is the sensitivity of the stock return with respect to the overall market return, and E(Rm – RFR) is the expected capital market risk premium.Empirical verification of CAPM is done by running a regression model of historical returns of stocks against historical returns of the overall market.In this assignment, your professor will assign you the stock of a publicly-traded company to conduct the following:
Re = α + β*Rm + ε (2)Where Re is the realized monthly rate of return of your stock, Rm is the realized monthly rate of return on the overall capital market, and ε is the error term.