capital asset pricing model
CAPM A theoretical framework in financial economics for analysis of the relationships between the *risks and *returns of securities. CAPM suggests that securities’ *prices tend to adjust to ensure that securities’ returns adequately reward investors who bear the risk of holding them within a perfectly *diversified *portfolio. CAPM makes a number of assumptions, including the following: (i) all the investors in a market hold a diversified portfolio of securities, so the activity of any single security will not materially affect the market; (ii) the risk of a particular security can be assessed only in terms of its performance to the rest of the portfolio; and (iii) the price of a security whose returns follow market trends will tend to be low. CAPM states that a security’s risk can be analyzed into *systematic and *unsystematic risk. The former is nondiversifiable risk and it is measured by the use of *beta (definition 1); the latter is a diversifiable risk.

Auditor's dictionary. 2014.

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