{"id":1217,"date":"2021-05-20T13:19:25","date_gmt":"2021-05-20T13:19:25","guid":{"rendered":"https:\/\/devu10.testdevlink.net\/dakota\/?p=1217"},"modified":"2024-08-14T21:18:06","modified_gmt":"2024-08-14T21:18:06","slug":"what-is-capm","status":"publish","type":"post","link":"https:\/\/devu10.testdevlink.net\/dakota\/what-is-capm\/","title":{"rendered":"What Is CAPM?"},"content":{"rendered":"

\"asset<\/p>\n

When a financial analyst values a stock, they use the weighted average cost of capital (WACC) to find the net present value (NPV) of future cash flows. The expected return can also be used as a discount rate to determine the present value of future cash flows from the stock. If the stock price is $75 and the present value of future cash flows using the 16% rate is $75, the stock is fairly valued.<\/p>\n<\/p>\n

Asset pricing and portfolio choice theory<\/h2>\n<\/p>\n

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If the present value is greater than $75, the stock is cheap. The CAPM formula describes the expected return for investing in a security that\u2019s equal to the risk-free return plus a risk premium. Specific risk can be reduced by diversification, or investing in a basket of different assets\u2014a concept that\u2019s at the heart of modern portfolio theory (MPT). But systemic risk is a tougher nut to crack since it impacts all investment assets in a similar way. Options, option portfolios, put\u2010call parity, and option bounds are explained.<\/p>\n<\/p>\n

Sign in<\/h3>\n<\/p>\n