About

The CAPM or capital asset pricing model was been mainly introduced by Sharpe (1964) and Lintner (1965) independently on the base of the Markowitz's (1956) research.

It is a model that allows to price an individual financial asset or portfolio that states the expected financial asset returns $E(R_i)$ is given by:

$E(R_i)$ = $R_f$ + $\beta_i*{(E(R_m)-R_f)}$

where:

  • $R_f$ is the risk-free rate of interest such as interest arising from government bonds;
  • $(E(R_m)-R_f)$ is the defined as the market premium;
  • $\beta_i$ is the sensitivity of the expected excess asset returns to the expected excess market returns, and, it is given by $\beta_i$ = ${COV(R_i;R_m)}\over VAR(R_m)$;
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