Capital Asset Pricing Model

Paper Summary:

This paper tells us that the asset pricing model evaluates a stock's rate of return based on a specific formula. The formula, rate of return = risk free interest rate + Beta x 8.7, is then explained by the paper.

From the Paper:

"1.A project cost $100,000 and offers you a beta-of-two expected return of $150,000 in one year; risk premium = 8.5%; the "Wall Street Journal" reports that the riskless rate is 5.0%; the appropriate discount factor is thus 22%; 150,000/(1.22) = $123,000 (approximately) - thus the project has a net present value of $23,000."

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