Capital Asset Pricing Model (CAPM)
Chapters in this video
- 0:00 Carla on the couch vs. the market highway
- 1:17 The CAPM formula and the market risk premium trap
- 2:59 Worked example: 3% risk-free, beta 1.5, 13.5% required return
- 4:03 Buy, sell, or hold against the CAPM benchmark
- 5:23 CAPM assumptions and historical-beta limitations
- 6:17 Full word problem: calculating positive alpha of 0.9%
- 7:46 Rapid-fire exam recap
What this video covers
- The CAPM formula E(R) = Rf + B(Rm - Rf) and what each component actually represents
- Why the market risk premium is the market return minus the risk-free rate, not the market return itself
- How to walk a full CAPM calculation from risk-free rate, beta, and market return to a single expected return percentage
- The counterintuitive rule that an actual return above the CAPM expected return means the security is undervalued (positive alpha, buy)
- How to compute alpha as actual return minus CAPM expected return, and what positive, zero, and negative alpha imply
- The core CAPM assumptions: rational investors, efficient markets, beta as the sole risk measure, and fully diversified portfolios
- Why beta relies on historical price data and what that limitation means for predicting future volatility
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