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CAPM (Capital Asset Pricing Model) and Its Practical Use.

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Finance & Accounting

Pages 8 (2008 words)

CAPM refers to the capital asset pricing model, a widely adopted model within the financial field in order to determine the value of the appropriate rate of return for an asset. …

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## Introduction

It is carried out through a properly designed and professional model that does not require to be completely renewed on a case by case basis. It has, therefore, met the requirements of the Asset Management industry in which the capacity to correctly price securities, and to properly infer the right rate of return. These are used to determine traditional and innovative alternative assets and provide all qualities that can make possible for a portfolio manager to gain an early lead over competitors (Brigham and Houston). The model, from a technical perspective, has been based on the works of Dr Harry Markowitz, a widely renowned professional and researcher who had been able to conduct important studies and researches in the field of diversification and of modern portfolio theory. According to his studies, some fundamental proven hypotheses can be synthesized as follows: Harry Markowitz, Nobel Prizer, investigated the effects of correlation rates and of diversification policies and strategies. As a result, he found that diversification in this sense, when correctly computed and carried out, can reduce and minimize the risk of a portfolio, together with an improvement of its required rate of returns. ...

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