It captures the linear relationship between the asset/portfolio and the market. Beta, as we noted above, is the beta coefficient of an asset that results from regressing the returns of that asset on market returns.

We are going to focus on one particular aspect of CAPM: beta. Plus, it might have been questioned by future research, but it’s still an iconic model that we should learn and love.

With that, we will forge ahead with our analysis because calculating CAPM betas can serve as a nice template for more complex models in a team’s work and sometimes it’s a good idea to start with a simple model, even if it hasn’t stood up to empirical rigor. Indeed, it is often the only asset pricing model taught in these courses…nfortunately, the empirical record of the model is poor.” 1 Fama and French have written that CAPM “is the centerpiece of MBA investment courses. That linear relationship is the stock’s beta coefficient, or just good ol’ beta.ĬAPM was introduced back in 1964, garnered a Nobel for its creator, and, like many ephocally important theories, has been widely used, updated, criticized, debunked, revived, re-debunked, etc. That will entail fitting a linear model and, when we get to visualization next time, considering the meaning of our results from the perspective of asset returns.īy way of brief background, the Capital Asset Pricing Model (CAPM) is a model, created by William Sharpe, that estimates the return of an asset based on the return of the market and the asset’s linear relationship to the return of the market. Today we will continue our portfolio fun by calculating the CAPM beta of our portfolio returns.

Capital asset pricing model equation