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YouTube T1-9 Capital asset pricing model (CAPM)

Nicole Seaman

Director of FRM Operations
Staff member
The CAPM is a ex-ante single-factor model where the single-factor is the market's excess return: it says that we should expect an excess return that is proportional to the stock's beta, which is the stock's exposure to market's excess return, as measured by the stock's beta. Beta can be retrieved by regressed the stock's excess returns against the market's excess return; beta is correlation to the market but scaled by cross volatility (beta increases with both higher correlation and higher stock volatility). From the perspective of factor theory, the higher expected return that accrues to higher beta stocks is compensation for higher risk; specifically, this is the risk that the stock performs worse when the market's return is negative.

David's XLS: http://trtl.bz/2z0vCwo

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