The Capital Asset Pricing Model

Michael Donadelli, Michele Costola and Ivan Gufler
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Michael Donadelli: University of Brescia
Michele Costola: Ca’ Foscari University of Venice
Ivan Gufler: Luiss Guido Carli

Chapter 3 in Essentials of Financial Economics, 2025, pp 73-96 from Springer

Abstract: Abstract The Capital Asset Pricing Model (CAPM), introduced by Sharpe (J Finan 19:425–442, 1964) and Lintner (J Finan 20:587–616, 1965), extends the framework of MPT. While MPT focuses on describing the demand for financial assets, CAPM shifts its emphasis toward pricing these assets by postulating equilibrium conditions in financial markets where supply equals demand. Similar to MPT, CAPM assumes that investors possess M-V utility and that returns on risky assets follow a normal distribution. Central to CAPM is the concept of the tangency portfolio, which, under certain assumptions, represents the optimal portfolio when considering the aggregation of all investors’ portfolios. This tangency portfolio mirrors the composition of the market portfolio and inherits its properties. The main asset pricing formula of CAPM stems from the equilibrium condition of asset markets, linking the risk premium of individual assets to their correlation with the market portfolio.

Date: 2025
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DOI: 10.1007/978-3-031-86189-5_3

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