latamen

Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is the product of a financial investment theory that reflects the relationship between risk and expected return. The model assumes a linear relationship.

The capital asset pricing model formula for calculating expected return is:

Quantitative investing
Quantitative investing

We’ve been leading the way in quant investing for over 25 years, turning research into practical solutions.

Read more

The Capital Asset Pricing Model is used to forecast returns that can be obtained with risk-bearing asset classes. The linear relationship means that taking extra risk will on average lead to higher returns.

However, empirical tests performed in the early seventies* with this capital asset pricing model showed that the relationship between risk and return is less strong than the theory indicates.

* One of the first tests was a study performed by Haugen and Heins: ‘On the Evidence Supporting the Existence of Risk Premiums in the Capital Market’ (1972). They demonstrated that over the period 1929 - 1971, low-volatility equities realized extra risk-adjusted returns.

Restoring the battered Value factor in equities
Restoring the battered Value factor in equities
The recent dreadful performance of the academic Value equity factor has been a blow for many investors.
20-10-2020 | Insight
There is more to factor investing than just Fama-French
There is more to factor investing than just Fama-French
The period of 2010-2019 was a lost decade for the five Fama-French factors, leading many to question whether Value was dead and whether Size had ever worked at all.
09-10-2020 | Video
Settling the Size matter in equities
Settling the Size matter in equities
The equity Size premium has failed to materialize since its discovery, almost forty years ago.
23-09-2020 | Research