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Finance GlossaryCapital Asset Pricing Model
Capital Asset Pricing Model
Definition of Capital Asset Pricing Model
Capital Asset Pricing Model or CAPM is used to determine the expected return one can earn on an asset by evaluating the associated risks and how markets price the asset.
Related Terms
Portfolio
A Portfolio is a collection or grouping of financial assets of an investor. A portfolio can have a diversified mix of assets such as equity shares, mutual fund units, government bonds, fixed deposits, gold, and real estate. The aim of building a portfolio is to manage the risk by diversification, ensuring that the poor performance of one asset is compensated for by the high performance of another. Portfolio management is one of the most important elements of financial planning for an investor.
Price Band
A price band is a regulatory mechanism or a voluntary limit set by an exchange or company that restricts the maximum and minimum price at which a security is allowed to trade for a given day. These bands, which are often expressed as a percentage above and below the previous day's closing price, are mainly implemented to prevent excessive volatility and market manipulation. Trading in the security is stopped or suspended if the price moves outside the set price band.
P/E Ratio (Price-to-Earnings)
Price to Earnings (P/E) Ratio is one of the most popular valuation ratios used by Indian investors. It measures the relationship between the current stock price and the earnings per share (EPS) of a company. The formula is: P/E Ratio = Market Price per Share / Earnings per Share (EPS). The P/E ratio shows how many times more than its earnings investors are willing to pay for one share of the company.
Premium
In finance, a premium is the excess amount that the price of a security or asset is over its nominal value, intrinsic value, or its price in another market or context. For options, the premium is the price that a buyer pays for an option contract. In insurance, a premium is the sum of money that an individual or business is required to pay for an insurance policy. A stock may trade at a premium if the market price is higher than its book value, which often reflects strong growth potential or market optimism.
Identifiable Asset
An identifiable asset is a tangible or intangible asset that be assigned a fair value at any point in time. This concept is important during acquisitions and mergers as not all assets on a company’s balance sheet can easily be valued.
Simple examlpeps of identifiable assets include machinery. You can easily identify machinery as a separate entity and assign it a value based on various factors.
Simple examlpeps of identifiable assets include machinery. You can easily identify machinery as a separate entity and assign it a value based on various factors.
Liquidity Risk
Liquidity Risk is the potential inability of a company to fulfil its debt obligations. It also refers to the lack of liquidity that an equity share of other financial instruments like commodity futures may carry.
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