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Capital asset pricing model - Asset pricing | | Capital asset pricing model - Asset pricing: Encyclopedia II - Capital asset pricing model - Asset pricing | | Once the expected return, E(ri), is calculated using CAPM, the future cash flows of the asset can be discounted to their present value using this rate to establish the correct price for the asset.
In theory, therefore, an asset is correctly priced when its observed price is the same as its value calculated using the CAPM derived discount rate. If the observed price is higher than the valuation, then t ...
See also:Capital asset pricing model, Capital asset pricing model - The formula, Capital asset pricing model - Asset pricing, Capital asset pricing model - Asset-specific required return, Capital asset pricing model - Risk and diversification, Capital asset pricing model - The efficient Markowitz frontier, Capital asset pricing model - The market portfolio, Capital asset pricing model - Assumptions of CAPM, Capital asset pricing model - Shortcomings of CAPM, Capital asset pricing model - Finding related topics | | | Capital asset pricing model, Capital asset pricing model - Asset pricing, Capital asset pricing model - Asset-specific required return, Capital asset pricing model - Assumptions of CAPM, Capital asset pricing model - Finding related topics, Capital asset pricing model - Risk and diversification, Capital asset pricing model - Shortcomings of CAPM, Capital asset pricing model - The efficient Markowitz frontier, Capital asset pricing model - The formula, Capital asset pricing model - The market portfolio | | |
| | | Capital asset pricing model: Encyclopedia II - Capital asset pricing model - Asset pricing
Capital asset pricing model - Asset pricing
Once the expected return, E(ri), is calculated using CAPM, the future cash flows of the asset can be discounted to their present value using this rate to establish the correct price for the asset.
In theory, therefore, an asset is correctly priced when its observed price is the same as its value calculated using the CAPM derived discount rate. If the observed price is higher than the valuation, then the asset is overvalued (and undervalued for a too low price).
Alternatively, one can "solve for discount rate" for the observed price given a particular valuation model and compare that discount rate with the CAPM rate. If the discount rate in the model is lower than the CAPM rate then the asset is overvalued (and undervalued for a too high discount rate).
Other related archivesArbitrage Pricing Theory (APT), Buffalo, New York, Efficient market hypothesis, Fischer Black, Good and bad betas, Harry Markowitz, Jan Mossin, John Lintner, Merton Miller, Michael Jensen, Modern portfolio theory, Myron Scholes, Nobel Memorial Prize in Economics, Valuation, William Sharpe, arbitrage, asset, assets, beta, capital markets, cash flows, complex, chaotic systems, discounted, diversified, finance, financial economics, infinitely divisible, lognormally distributed, market portfolio, market risk, mutual fund, portfolio, present value, random, rational expectations, return, risk, risk averse, risk-free, risk-free rate of interest, security, sensitivity, specific risk, systematic risk, uncorrelated, variance, volatility arbitrage
 Adapted from the Wikipedia article "Asset pricing", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki |
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