FIN3 CASE, SLP, and Thread Discussion

Module 3 - Home

The Capital Asset Pricing Model

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

•Case ◦Distinguish between diversifiable and undiversifiable risks and explain the implications.

◦Discuss the content and assumptions of the Capital Asset Pricing Model.

◦Identify and explain practical uses for Capital Asset Pricing Model.

◦Describe the process of risk/return analysis.

•SLP ◦Describe the process of risk/return analysis.

◦Describe the theoretical and practical problems associated with using the Capital Asset Pricing Model.

◦Discuss the content and assumptions of the Capital Asset Pricing Model.

◦Identify and explain practical uses for Capital Asset Pricing Model.

•Discussion ◦Discuss the content and assumptions of the Capital Asset Pricing Model.

◦Identify and explain practical uses for Capital Asset Pricing Model.

◦Describe the process of risk/return analysis

◦Describe the theoretical and practical problems associated with using the Capital Asset Pricing Model.

Module Overview

In Module 2 you learned about the importance of present value and the discount rate. But now that you know how to compute present value and you know what a discount rate is, how do you calculate an appropriate discount rate? That is one of the purposes of this module.

The Capital Asset Pricing Model (CAPM) is one of the most commonly used tools by financial professionals. Developed by Nobel Prize winning economist William Sharpe the CAPM is used today for a large number of purposes.

The CAPM is used to value stocks, and help choose portfolios. It is also used to estimate appropriate discount rates in present value calculations, especially in capital budgeting decisions. It is a major tools used in the assessment of the rate of return that shareholders of companies require as the 'minimum rate of return' that their company should earn on the investors' investment in the shares of the company.