capital asset pricing model

• CAPM model gives us a manageable way of considering the requried return on a risky investment
• CAPM model:

  you can measure unsystematic risk of an investment by the extent to which the investment is affected by the beta of the investment
• CAPM model:

  • average return for low-beta stocks are higher than what the model predicts
  • average return for high-beta stocks are lower than what the model predicts
• we do not know why a firm's size and a book to market ratio are related to the stock's market value (Fama and French model)