CAPM Expected Return

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Definition

Capital Asset Pricing Model (CAPM) was introduced by Jack Treynor, William Sharpe, and John Litner independently building on work done by Harry Markowtiz's efficiency frontier theories.

The CAPM is a measure of the relationship between risk and expected return of a security. The idea is that an investor should be compensated by the amount of risk he/she takes on, in addition to the expected market return.

Formula

CAPM Expected Return = Annualized Expected Market Return x Company's 60 Month Market Beta

The Annualized Expected Market Return is calculated by taking the historical average of the Fama-French Monthly Market Benchmark withholding the prior 12 months, and annualizing this average.

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