Question

What is the intent of the CAPM? What is it trying to tell investors and how might it impact an investor's stock selection decisions?

Answer 1

CAPM is used to find expected return of the stock.

Expected return = risk free rate + beta (market return – risk free return)

It describe a relation between risk and expected return of the asset.

The general thought behind CAPM is that financial specialists should be repaid in two ways: time estimation of cash and risk. The time estimation of cash is spoken to by the risk-free (rf) rate in the recipe and repays the financial specialists for putting cash in any venture over some undefined time frame. The risk-free rate is usually the yield on government bonds like U.S. Treasuries.

The other portion of the CAPM recipe speaks to risk and figures the measure of pay the financial specialist requirements for going out on a limb. This is computed by going out on a limb measure (beta) that thinks about the returns of the asset to the market over some stretch of time and to the market premium (Rm-rf): the arrival of the market in abundance of the risk-free rate. Beta reflects how risky an asset is contrasted with general market risk and is a component of the volatility of the asset and the market and also the connection between's the two. For stocks, the market is generally spoken to as the S&P 500 however can be spoken to by more hearty records too.

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Hope that helps.

Feel free to comment if you need further assistance J